Plan to Reshape Mortgage Market By Nick Timiraos and Michael R. Crittenden Wall Street Journal 03-23-2010

Plan to Reshape Mortgage Market
By Nick Timiraos and Michael R. Crittenden
The Wall Street Journal
March 23, 2010

Fannie Mae and Freddie Mac won't be allowed to return to a precrisis structure that rewarded shareholders with big profits for years but ultimately saddled taxpayers with massive losses, Treasury Secretary Timothy Geithner will tell a congressional panel on Tuesday.

The administration will outline broad principles for the future of the mortgage market at the hearing, including stronger consumer protections and explicit guarantees for any government backstop of mortgages.

"The housing-finance system cannot continue to operate as it has in the past," Mr. Geithner says in prepared testimony. The administration won't issue a detailed overhaul proposal until later this year.

The hearing comes as Congress turns up the pressure on the administration to discuss how it plans to rebuild the mortgage market, the recipient of massive government support since the credit crunch began more than two years ago. "We need people to start focusing on it. Nobody was coming up doing the hard thinking,'' said Rep. Barney Frank (D., Mass.), who said he called the hearing to accelerate debate on the future of Fannie and Freddie.

The government took control of Fannie and Freddie through a legal process known as conservatorship 18 months ago. It has injected $127 billion to keep the companies afloat and pledged unlimited bailout aid over the next three years. In testimony, Mr. Geithner will defend the administration's actions to shore up the companies as "unfortunate and undesirable" but nevertheless necessary to offset a "much more wrenching decline in housing prices."

Republicans, meanwhile, are renewing calls for the government to move toward privatizing the companies. Their proposal calls for a housing-finance system "in which private capital is the primary source of mortgage financing" and recommends winding down the current operations of Fannie and Freddie over the next four years. Fannie and Freddie, together with the Federal Housing Administration, now back more than 9 in 10 home loans.

"They've allowed this monster to kind of burn out of control,'' says Anthony Sanders, a real-estate finance professor at George Mason University in Fairfax, Va., who supports privatization.

The administration and its backers have warned against taking dramatic action at a time when housing and mortgage markets are still fragile. "The calls for quick action aren't serious—they are potentially destabilizing posturing and bluster that could have dangerous consequences for the economy,'' said Sarah Rosen Wartell, a Clinton administration housing official who now works at the Center for American Progress, a liberal think tank.

But industry analysts say that at some point, delaying action could breed uncertainty that could be equally troublesome for markets. "The problem you have with constantly punting the issue down the road is it is going to be a bear to wean the market from government support,'' said Thomas Lawler, an independent housing economist in Leesburg, Va., who worked at Fannie Mae for more than two decades. "The longer a market gets used to everything going government, the harder it is to get off of that.''

Mr. Frank, who is chairman of the House Financial Services Committee, dismissed the Republican proposal as thin on substance. "They have a long process for phasing out Fannie and Freddie and then at the end they say, 'Somebody should do something about the future,' '' he said. "We agree Fannie and Freddie should be replaced. Until you've decided what to replace them with, it would be a mistake to abolish them.''