Treasury Secretary Timothy F. Geithner used his strongest language yet to warn on Tuesday about the dangers of a mortgage system that does not include a significant role for the government.
Two weeks after releasing a white paper on how to overhaul the badly battered housing market, Geithner said scaling back the federal role too far could make housing more costly, keep taxpayers on the hook for losses and handcuff policymakers.
“You would leave the government of the United States with a more limited set of tools to protect the economy and innocent victims in the face of the next severe recession,” he said in testimony to the House Financial Services Committee.
The nation’s housing finance system now relies almost exclusively on federal support for funding new home loans — through the taxpayer-backed housing finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration, which provides loans to home buyers without much money for a down payment.
In its white paper, the administration announced short-term steps to slightly reduce government support for housing — with the hope that banks will do more to provide mortgage funding — and offered three options for the longer-term overhaul of the housing market.
All of the options retain the FHA, with a focus on loans to people who cannot afford to make a sizable down payment of 10 to 20 percent. And all of the options eliminate Fannie and Freddie — but they differ on whether or how to replace them.
The first option cuts off federal support other than through the FHA and does not replace Fannie or Freddie.The second and third provide a new type of federal backing for a broader range of mortgages beyond low-down-payment loans. One of those options is activated during times of crisis to ensure that affordable mortgages remain available. The other is designed to keep mortgage rates lower all the time, somewhat similar to the existing system.
While Geithner has worked hard to maintain a neutral tone and not endorse any of the options, his comments Tuesday revealed a deep skepticism about the first.
In response to questioning, he said that if no government program exists to support mortgage lending, banks will make the loans and take on the risk themselves. “The government does provide support to banks. The guarantee then is implicit,” he said. “Don’t look at that as such an appealing option. It looks like it’s a more private solution but it may not be in the end.”
He said the FHA could play the role of an emergency backstop that would keep the mortgage market alive during times of deep stress. But he warned that this approach, too, would carry major risks for taxpayers and that it would be difficult to determine when the government should step in.
Geithner said it is important that the administration and Congress move gradually with any reforms to the housing market. “It’s going to take us a long time to repair the damage caused by the crisis,” he said.
He said he’d like legislation to be in place within two years, but the eventual winding down of Fannie and Freddie and the creation of a new federal system for backing mortgages could take five to seven years.
The testimony came as Congress weighs legislation this week that would eliminate programs that aim to help struggling borrowers and foreclosure-plagued communities.
The most high-profile targeted program is the administration’s marquee foreclosure prevention effort, known as the Home Affordable Modification Program. The program has permanently modified about 600,000 loans — far short of the 3 million to 4 million that the administration initially projected.
A House Financial Services subcommittee plans to hold a hearing Wednesday about the Republican-led effort to dismantle the program and other initiatives.
“These programs were set up in haste, executed poorly and have done little to restore stability in the marketplace,” Judy Biggert (R-Ill.), the subcommittee’s chairwoman, said in a statement Tuesday.
The administration continues to praise its loan modification program for providing a framework that the lending industry has adopted and helping stabilize housing prices nationally by keeping thousands of borrowers in their homes.
Housing and Urban Development Secretary Shaun Donovan conceded that the program has not reached as many people as expected. But that does not mean the program should end, he told House lawmakers at a hearing Tuesday. “There still are tens of thousands of homeowners who get modifications each month under the program,” he said.
Republicans also want to gut funding for an initiative that helps communities buy and redevelop foreclosed properties and for another that provides emergency mortgage relief payments to unemployed workers in some states. The other targeted program allows borrowers who are current on their mortgage to refinance into FHA loans if they are underwater, meaning they owe more than the home is worth. About 44 loans have been closed under this program.