No government plan to exit mortgage industry expected

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Published: August 17,2010

Tags: bailout, economy, mortgage, real estate, recession

WASHINGTON — Talk of shrinking the government’s involvement in the mortgage market is growing. Just don’t expect action any time soon.

A conference today at the Treasury Department is the first of many steps toward restructuring the nearly $11-trillion mortgage market. So far, rescuing mortgage giants Fannie Mae and Freddie Mac has cost the government more than $148 billion. That number is expected to grow.

Treasury Secretary Timothy Geithner will address the conference but is not expected to offer an exit strategy today. The administration has said it won’t offer its plan until next year.

Officials are pledging dramatic changes to the structure of Fannie and Freddie, which profited tremendously during good times but burdened taxpayers with losses when the housing market went bust.

“We will not support a return to the system where private gains are subsidized by taxpayer losses,” Geithner said in remarks prepared for the conference.

With Republicans likely to pick up seats in Congress in November, however, the Obama administration will need support from both political parties for the changes it proposes.

Reflecting this reality, Geithner will say today that “the failures that produced the system we have today were bipartisan. The solution must be as well.”

Executives and mortgage experts are prepared to tell Obama officials that that the government must stay in the business of backing U.S. mortgages even if Fannie and Freddie disappear someday.

“At the end of the day, the government will still have a very large role to play,” said Mark Zandi, chief economist at Moody’s Analytics and a panelist at the event. Others include mortgage executives from Bank of America Corp. and Wells Fargo & Co, plus Bill Gross, managing director of bond giant Pimco and Lewis Ranieri, one of the creators of mortgage bonds.

The Obama administration’s management of Fannie and Freddie has been under fire for months from Republicans on Capitol Hill. In December, the Treasury Department eliminated a $400-billion cap on how much money it would give the mortgage giants to keep them from failing. Sen. John McCain, R.-Ariz., has called that a “taxpayer-backed slush fund” and called for the support to be wound down.

Many in the mortgage industry say that’s not realistic.

“There has to be a game plan,” said Paul Leonard, vice president of government affairs at the Housing Policy Council, a mortgage industry group. “You can’t just pull the plug on them.”

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans — even after the housing market collapsed.

The two mortgage giants, the Federal Housing Administration and the Veterans Administration together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance.

At some point the government will have to scale back the level of support it provided the housing and mortgage markets during the recession and financial crisis.

“The government’s footprint in the housing market needs to be smaller than it is today,” Shaun Donovan, President Barack Obama’s housing secretary, said in prepared remarks.

Most of the plans being circulated to reshape the mortgage market call for the government to guarantee that investors who buy mortgage-backed securities receive their money even if borrowers default.

Under this system, Fannie and Freddie could either be returned to private ownership or phased out completely. Fannie and Freddie, or their replacements, would pay the government to insure the loans. That money could be tapped if the housing market collapses.

“A government guarantee is both a desirable and necessary component of the country’s housing finance system,” wrote John Gibbons, a Wells Fargo & Co. executive vice president, in a letter last month to the Treasury Department.

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