Geithner Unveils 7-Year Plan for Fannie and Freddie
Pillars of reform include reducing the government's footprint in the housing market, adjusting the role of the banks, and putting more emphasis on renters.
On Thursday, February 10, Treasury Secretary Timothy Geithner gave the opening discussion regarding "The Future of Fannie Mae and Freddie Mac" at the Brookings Institution in Washington, DC. (Click here for the full agenda). The discussion was moderated by Martin Baily, former chair of the Council of Economic Advisers under President Clinton.
Secretary Geithner presented what he called the "basic pillars of a credible reform plan" for the GSEs:
- First, to wind down Fannie Mae and Freddie Mac and "substantially reduce" the government's footprint in the housing market, while being careful not to impede the recovery effort.
- Second, for the private sector to take on a "greater burden" in the housing finance market, while giving investors and banks time to adjust and understand what will be the "new economics of mortgages" in the US.
- Third, to define a "substantial but more targeted role" for the government in "supporting affordability" in general -- including renters and not only homeowners in assistance programs.
Additionally, once the approximately seven-year wind-down is reaching its end, Secretary Geithner stated that the government must decide by what mechanism it will still be involved with the housing market. He mentioned that the White Paper attempted to "narrow the field to a credible set of ultimate reform options" including:
- Heavily limiting the role of the FHA, with a "sensible set of reforms to get the economics better."
- Secretary Geithner stated that the FHFA and the FHA will lay out to the market an "indicative transitional path" available for public comment, which will need to be revisited over time.
- Complementing the FHA's role with an "emergency backstop mechanism," which would be employed only in times of financial crisis -- with the intention being that as financial conditions improve, the demand for the government "backstop" will recede.
- Redesigning a standing guarantee or insurance mechanism available to a "broader class of homeowners" -- with losses to be recouped on the broader market over time.
Role of the Banks
Secretary Geithner suggested that the ultimate policy implemented will likely be a mix of the options above.
Secretary Geithner stated that there are three things currently in the way of full economic recovery:
1. The economics of what the government is doing now -- It is currently more attractive to go through a government program than through the market.
2. Lack of clarity in what proposed reforms will be -- He stated that the Dodd-Frank Act requires much rule-writing across the board, and until that process is complete it will be more difficult for banks to decide how much capital to put up against mortgages.
3. Time -- Secretary Geithner stated that we are three years into the "adjustment process" post-financial collapse, and he predicted that we have three more years to go for substantial uncertainty to be reduced.
Secretary Geithner stated that he wants to "preserve a financial system in which banks are a substantial source of credit, but not the only source." He stated that the US needs a system where banks put more capital against risk, and homeowners have more equity in their homes. However, he stated that he would not support creating a system where banks are the "overwhelmingly dominant source of credit."
In response to a question from a Brookings analyst, Secretary Geithner briefly discussed his views on rental housing, stating that in his view too much government assistance for individuals went to homeowners, and that there is a "fundamental unfairness" in providing a subsidy only to that class of individuals. He also stated that the Department of Housing and Urban Development would be responsible for designing programs for rental assistance.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.