Treasury Secretary Tim Geithner laid out a surprisingly vigorous defense today for a substantial government role in the nation’s housing market. Kicking off the Treasury’s conference on the future of housing finance, Geithner gave short shrift to demands from some conservatives to abolish Fannie Mae, Freddie Mac and other “government-sponsored enterprises” that currently guarantee more than 90 percent of all new mortgages.
Geithner also said the government should keep providing guarantees for many mortgages, though he said the key is to properly charge for those guarantees so that taxpayers aren’t left holding the bag. “This question is really about whether the government – in order to make sure that Americans can borrow at reasonable interest rates to buy a house even in a downturn – has to provide a form of guarantee or insurance against losses,” Geithner said in his opening remarks.
Geithner’s answer: Yes.
“Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale,” Geithner said. “House price declines could be more acute, with even greater damage to financial wealth and economic security.”
To be sure, Geithner said the massive tangle of public and private activities embodied in Fannie and Freddie – two for-profit corporations that went broke and left taxpayers on the hook for more than $5 trillion in mortgages – cannot continue in anything like its current form. He specifically endorsed a “wind-down’’ of those companies’ gigantic investment portfolios. Those portfolios, which now hold $1.6 trillion in mortgage-backed securities, generated huge source profits for years because Fannie and Freddie were able to finance them by borrowing money at lower rates than their private-sector competitors.
But he suggested that the real problems with Fannie and Freddie stemmed from failed regulation, which he said the government has already begun to address. The new Dodd-Frank financial reform bill, he said, will tighten rules even further on mortgage lending and securitization. “Reform,” Geithner said, quoting Rep. Barney Frank of Massachusetts, “is about more than designing an elegant funeral for Fannie and Freddie.”
To a great extent, Geithner was simply expressing the conventional wisdom through much of the financial industry: Abolishing government backstops would leave a huge hole in the mortgage market because private investors aren’t willing to take the risks on their own. “Unfortunately, the government is part of our future, not only for the mortgage market but for other markets as well,’’ said Bill Gross, chief executive of PIMCO, the nation’s biggest bond manager.
“PIMCO would not buy a private or privately insured mortgage pool unless it was accompanied by 30 percent down payments,’’ Gross told the conference. “Without government guarantees, mortgages would be hundreds, hundreds of basis points higher.”
That won’t go down well with some Republicans in Congress, who have been pushing for years to dramatically pare back Fannie and Freddie and do away with most of the guarantees. During the recent Senate battle on overhauling financial regulation, Republicans pushed for an amendment that would have phased out Fannie and Freddie over the next several years. In the House, a vocal minority of conservative Republicans led by Rep. Jeb Hensarling of Texas have proposed similar legislation.
