By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, March 24, 2010; A14
Treasury Secretary Timothy F. Geithner on Tuesday told a congressional panel considering the future of Fannie Mae and Freddie Mac that the Obama administration would seek to keep in place aspects of the housing-finance system that have worked well during the past few decades as it overhauls the parts that did not.
In response to questioning, Geithner said mortgage-finance giants Fannie and Freddie were at the center of a system that "was in many ways the envy of the world" for many decades. "It's important as we think about the future to make sure we retain what was good in this system," he said.
But the Treasury secretary said that the old system would not be re-created and that Fannie and Freddie's status as shareholder-owned companies with the implicit backing of taxpayers would end. "We're going to have to do fundamental change," Geithner said, adding that the government would make clear what it stands behind and what it doesn't.
Fannie and Freddie, under federal control, have played essential roles in the government's strategy for reviving the housing market, but they have needed more than $125 billion in taxpayer aid to stay afloat. In large part, they operate by guaranteeing that investors in home loans are made whole. The Obama administration has pledged unlimited assistance to them.
Critics of Fannie and Freddie are skeptical of the government playing any role in fostering homeownership, but Geithner said the administration would continue to advocate using some form of taxpayer guarantee to ensure that borrowers of different means can get home loans.
"My own view is there's probably going to be a good economic case, good public-policy case, for some continued provision of a carefully designed guarantee by the public sector going forward," he said.
Geithner's testimony before the House Financial Services Committee came after the administration missed a self-imposed deadline to produce a preliminary proposal to overhaul Fannie and Freddie. Geithner said it will take more time to come up with such a plan.
"Realistically, it's going to take several months to do a careful exploration of the problems, solutions, alternative models, and to try to shape legislation that could command consensus," he said. "But I don't see why this should take years."
Republicans expressed outrage that the administration still had not come up with a strategy to overhaul the companies 18 months after they were seized, even as it pursues other measures to reform financial regulations.
"It's unacceptable . . . that the Treasury Department still does not have a plan for Fannie and Freddie," said Rep. Spencer Bachus (Ala.), the ranking Republican on the committee. "Without reform, the bailouts will not stop, the housing market will not find its footing and the American economy will not recover."
The issue of Fannie and Freddie has long been a hot potato on Capitol Hill. Democrats defended the companies as important tools for promoting homeownership, especially for low- and middle-income buyers. But Republicans saw the companies currying favor with Democrats by showering them with campaign cash and derided the firms as government-created corporate Frankensteins.
"Of all the dumb regulation and legislation that caused our economic crisis, none was dumber than that which created the [Fannie and Freddie] monopolies and gave them ever-increasing affordable-housing missions," said Rep. Jeb Hensarling (R-Tex.), who has introduced a bill to privatize or abolish the companies.
Geithner said the administration will kick off a public comment period on April 15 to solicit ideas for reform. He laid out several principles, including that borrowers should be able to get home loans even during periods of economic distress and that low-income people should not be excluded from financing to buy homes.
Some Democrats say that Fannie and Freddie remain the best hope for the housing market.
"I have yet to see a viable alternative from this administration or this Congress," said Rep. Gary G. Miller (D-Calif.). "We must find a path to effectively return Freddie and Fannie to profitability, allowing the government to recoup its investment in the secondary firms, and ensure that there is a viable secondary mortgage market."
Rep. Barney Frank (Mass.), the Democratic chairman of the House Financial Services Committee, decided to hold the hearing because he wanted to force the administration to begin to consider how to remake Fannie and Freddie, he said in a recent interview. Frank has said he wants eventually to abolish the companies, but still expects the government to play a role providing funding for low-income housing and subsidies for homeownership.
At the hearing, Frank said several times that debate over housing policy focused too much on assisting home buyers and not enough on building more affordable rental housing.
"It's a mistake for the government heavily to subsidize homeownership," Frank said. "We are much better off trying to subsidize rental housing, because when you put people into decent rental housing, you do not confront the problems we have seen putting people inappropriately into homeownership."