Fannie, Freddie overhaul moving ahead gingerly

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, July 28, 2010

The Obama administration on Tuesday tiptoed closer to overhauling Fannie Mae and Freddie Mac, announcing a conference next month to begin a public discussion on how to remake the nation's system for funding home loans.

In a departure from the bold declarations that accompanied the unveiling of its proposed overhaul of financial regulations, the administration has been taking an incremental approach to housing reform.

Administration officials say they fear that any specific proposal could rattle the extremely fragile housing and mortgage markets, which today are supported to a great extent by government programs.

"It'll be very irresponsible of us to jump out with some bold declaration of where we want to be if that were going to result in large segments of the marketplace panicking," said an administration official who spoke on the condition of anonymity because the discussions are still preliminary. "We're not that removed from a time when the market was in panic, and we have to be extra guarded . . . to make sure we don't get back to that place."

But whatever officials might think about the timing, the administration faces a looming deadline of January 2011, imposed by the new financial regulatory reform law, to come up with a clear plan for overhauling housing finance.

Three months ago, the Treasury and Department of Housing and Urban Development released seven broad questions to guide thinking on how to reshape housing finance. They received more than 300 comments by last week's deadline.

The housing conference, scheduled for Aug. 17 at the Treasury, will bring together academics, consumer and community groups, industry representatives and other stakeholders for discussions on housing reform.

"The future of our housing finance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country," said Treasury Secretary Timothy F. Geithner, who will lead the effort with HUD Secretary Shaun Donovan. "Now is the time to build on the foundation we laid with the historic Wall Street reform legislation President Obama signed last week and aggressively move forward to improve our nation's housing finance system."

Since 2008, the federal government has committed hundreds of billions of dollars to keep the housing market afloat and ensure that borrowers can get loans.

Fannie Mae and Freddie Mac, the mortgage-finance giants seized by the government in September 2008, and the Federal Housing Administration have been nearly the only sources of backing for new loans.

Now the Obama administration is starting to look for ways to slowly unwind the huge government programs supporting homeownership and to restore the traditional role of the private sector. But it is not an easy transition.

"We want the private sector back in," said another administration official, who also spoke on the condition of anonymity. "There are signs, but it's very minor, I have to say."

Jeffrey Goldstein, under secretary for domestic finance at the Treasury, wrote in an essay on the White House Web site Tuesday that it will be very difficult to totally unwind the government's role in covering losses related to the housing crisis.

"The losses that the federal government has had to backstop are virtually all attributable to bad loans that Fannie and Freddie took on between 2005 and 2007 -- during the height of the housing bubble," he wrote. "Unfortunately, we still need to manage the continuing consequences of those poor credit choices."

Although officials are just getting started with the overhaul, some subtle shifts are already becoming clear.

The administration is pursuing a policy overhaul that could break from the emphasis on homeownership embraced by previous administrations.

The Obama administration has a narrower view of who should own a home and what the government should do to support homeowners. For example, the administration might seek to wind down some government backing for home loans and increase the focus on affordable rentals.

Geithner has said he favors government support of homeownership in general and of low-income borrowers in particular.

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