Geithner Sets Two-Year Target on Housing Finance Reform

Treasury Secretary Timothy F. Geithner told thernHouse Committee on Financial Services today that Congress must tackle reformingrnFreddie Mac and Fannie Mae or the government sponsored enterprises (Enterprises)rnwill merely return to their old form. </p

Geithner’s prepared testimony before therncommittee was based on the Obama Administration’s White Paper, released two weeksrnago, outlining its vision for reforming the housing finance market.  In that vision, the Treasury Secretary said therngovernment’s primary role will be limited to consumer protection and oversight,rntargeted assistance for low-and moderate-income homeowners and renters; and arntargeted capacity to support market stability and crisis response.  </p

In other words, the Administration isrncommitted to a private market system subject to strong oversight, consumer andrninvestor protections and in which the private market, not American taxpayers,rnbear the burden for losses.</p

Geithnerrncriticized the government’s long-standing role in housing finance for supporting incentivesrnthat distorted the market, created significant moral hazard, and ultimatelyrnleft taxpayers responsible for the resulting mess.  While all Americans should have access tornaffordable, quality housing, he said, the goal should not be for every Americanrnto become a homeowner.  Targeted andrneffective support should be available to families who have the financialrncapacity to own a home but are underserved by the private market coupled with arnrange of options for Americans who rent.</p

Hernemphasized the important of winding down Fannie and Freddie at a careful andrndeliberate pace so as to not shock an already fragile housing market and saidrnthis can be accomplished by:</p<ul class="unIndentedList"<liGraduallyrnincreasing guarantee pricing at the Enterprises as if they were held to thernsame capital standards as private institutions;</li<liReducingrnconforming loan limits by allowing the temporary increases enacted in 2008 tornexpire as scheduled on October 1, 2011</li<liGraduallyrnincreasing the amount of private capital that risks loss ahead of taxpayers throughrncredit loss protections and gradually increased down payment requirements;</li<liContinuedrnwind-down of Enterprise investment portfolios at a rate of no less than tenrnpercent a year.</li</ul

As thernEnterprises presence is decreased, Geithner said the administration will alsornscale back FHA “to its more traditionally targeted role.”  The maximum loan size should be reduced, andrnonce it returns to pre-2008 levels, we should review whether further decreasesrnare warranted.  The pricing of FHArnmortgage insurance should also increase beyond the two rounds of increasesrnalready enacted, both to strengthen the capital reserve account and to align itsrnpricing structure in a more appropriate relationship with the private sector.</p

ThernAdministration also supports reforms at the Federal Home Loan Banks (FHLBs) byrninstituting single district membership, capping the level of advances for anyrninstitution, and reducing the FHLB’s investment portfolios.</p

Governmentrnreform of government, Geithner said, is only half of the picture.  “We must also pursue reforms thatrnrestore confidence in the mortgage market among borrowers, lenders, andrninvestors.”  The Dodd-Frank Act laidrnthe groundwork for many of these reforms and Treasury is coordinating changesrnto the securitization market that will require originators and securitizers tornretain risk while the Consumer Financial Protection Bureau will soon assumernauthority to curb abusive practices and promote choice for consumers.  Also underway are changes to bank capitalrnstandards and reforms to the servicing industry.  The latter includes designing nationalrnservicing standards and identifying ways to reduce conflicts of interest betweenrnholders of first and second mortgages and improving incentives for servicers tornwork with troubled borrowers.</p

Geithnerrnsaid the Administration has laid out three potential options to structure governmentrnsupport in a housing finance market where the private sector is the predominantrnprovider of credit and bearer of mortgage risk. rnIn each, government support would be “transparent, explicit, andrnlimited,” and each would preserve FHA assistance and similar governmentrninitiatives that assist targeted groups such as low- and moderate-incomernfamilies, farmers, and veterans.</p

Thernfirst option would limit government’s role almost exclusively to those targetedrnassistance initiatives.  The vastrnmajority of mortgages would be financed by the private sector and would notrnbenefit from a government guarantee.</p

Thernsecond option would complement targeted assistance though FHA and other initiativesrnwith a government backstop designed to promote stability and access to mortgagerncredit in times of market stress.</p

Thernthird option would have the government, in addition to the FHA and targetedrnassistance initiatives, provide reinsurance for certain securities that wouldrnbe backed by high-quality mortgages. rnThese securities would be guaranteed by closely regulated privaterncompanies under stringent capital standards and strict oversight and reinsuredrnby the government which would charge a premium to cover future claims and wouldrnonly pay those claims after private guarantors are wiped out.  </p

Geithner said in his prepared remarks that he hopes comprehensive housing finance reform legislation will pass a Congressional vote in the next two years. He added, “Failing to act would exacerbate market uncertainty and risk leaving many of the flaws in the market thatrn brought us to this point in the first place unaddressed.”</p

Followingrnhis testimony, committee members questioned Geithner about the costs involvedrnin these options.  The Secretary saidrnthat costs to the consumer will be higher under any of the reforms but thatrnunder the first reform they would be higher than under the second or third.  Each ofrnthe longer-term reforms outlined will require action by Congress, the Secretaryrnsaid, but by providing a narrow set of options and key criteria by which theyrnshould be judged, the Administration hopes to encourage an honest conversationrnabout the merits and drawbacks of each. </p

Below you find a quick recap of Geithner’s responses to the Congressional questions that followed his prepared testimony…</p

RTRS-U.S. TREASURY’S GEITHNER SAYS 90 PCT ROLE FOR GOVT BACKED MORTGAGES NECESSARY NOW, BUT NOT IN THE FUTURE</p

RTRS-U.S. TREASURY’S GEITHNER SAYS HOUSING DOWNTURN WOULD HAVE BEEN MUCH MORE SEVERE WITHOUT THE SUPPORT OF FANNIE, FREDDIE</p

RTRS-U.S. TREASURY’S GEITHNER SAYS LEAVING FHA AS ONLY BACKER OF MORTGAGES MAY NOT ACTUALLY REDUCE TOTAL GOVT ROLE IN HOUSING MARKET</p

RTRS-GEITHNER-CONGRESS CAN MIX OPTIONS PROPOSED BY TREASURY FOR FANNIE, FREDDIE REFORM</p

RTRS-GEITHNER-SAYS NO GUARANTEES THAT PRIVATE SECTOR WILL STEP BACK INTO MORTGAGE MARKET</p

RTRS-GEITHNER-IN ALL REFORM OPTIONS, FHA MUST HAVE THE ABILITY TO PROVIDE MORTGAGES TO LOW/MODERATE INCOME FAMILIES WITH MODEST DOWNPAYMENT</p

RTRS-GEITHNER SAYS TERMINATING MORTGAGE MODIFICATION PROGRAM WOULD CAUSE A LOT OF DAMAGE TO FRAGILE HOUSING MARKET

RTRS-U.S. TREASURY’S GEITHNER SAYS FANNIE FREDDIE OPTION WITH EXPLICIT GUARANTEE HAS “A LOT OF MERIT”</p

RTRS-GEITHNER-HARD TO KNOW IF U.S. HOUSING MARKET HAS BOTTOMED OUT</p

RTRS-GEITHNER-HOUSING MARKET STILL HAS A LOT OF DAMAGE TO ABSORB; NEEDS TIME TO RECOVER</p

RTRS-GEITHNER SAYS WOULD NOT LOOK TO EUROPEAN SYSTEM OF HOUSING FINANCE AS APPEALING ROLE MODEL FOR U.S.

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