WASHINGTON Republicans must come to grips with how to overhaul housing finance if they are serious about ending the government's leading role in the wrecked system, Treasury Secretary Timothy Geithner said on Tuesday.
Republicans, who now control the House of Representatives, want to scale back the government's footprint in housing finance and give the private sector a larger role.
With property markets still fragile and 2012 elections looming, the Obama administration wants Republicans to choose among reform options so home foreclosures and mortgage financing costs doesn't become a festering political issue.
In what amounted to an opening round of talks on how to wind down government-sponsored enterprises (GSEs) Fannie Maeand Freddie Mac, and get the private sector more involved in the $10.6-trillion market that cratered in 2008, Geithner warned the housing sector was "still in a very difficult state."
"You can't delay indefinitely on legislation defining an ultimate solution," Geithner told a congressional committee. "If you do nothing...in many cases you would recreate Fannie and Freddie."
Geithner testified before the House Financial Services Committee for the first time since the Treasury unveiled several options on February 11 for overhauling the finance system that collapsed in 2008, triggering mass home foreclosures.
Any legislation has to get through a Democratic-controlled Senate after it clears the House of Representatives. It is likely to be a multi-year effort to complete reforms.
"House Republicans are ready and willing to ... work with (the administration) to produce a comprehensive housing finance reform plan -- a plan that is based on private capital and protects taxpayers from further losses and future bailouts,"
Committee Chairman Spencer Bachus said.
On Monday, Rep. Scott Garrett who chairs the House panel overseeing Fannie and Freddie told the Reuters Future Face of Finance Summit he expected the House of Representatives
to approve a measure overhauling the structure of the GSEs by the end of 2011. But he added: "what happens in the Senate is always a question mark."
Fannie and Freddie have taken more than $134 billion in direct taxpayer aid and the government estimates that total could climb as high as $259 billion.
Two and a half years after the government took control of Fannie and Freddie it still backs nearly nine in 10 new mortgages.
Geithner warned that if any proposal is put forward that would extend Fannie and Freddie's existence or raise eventual costs to taxpayers from winding them down, "we will resist."
In response to questions, Geithner said whatever reforms are eventually agreed, mortgage costs were likely to be "modestly higher" in future.
He suggested that it was "very important" for Americans to recognize that putting bigger down payments on home purchases could be beneficial by providing "a bigger cushion of equity" that adds stability for families and markets.
Michael Capuano, a Massachusetts Democrat, warned against relying too much on private capital for mortgages and the higher down payments required under a new system.
"I am not interested in pulling up the ladder because I got lucky enough to have my house," Capuano told Geithner.
The most drastic of the administration's three options would privatize housing finance almost entirely, with government insurance and guarantees limited to FHA and other programs for low- and middle-income borrowers.
Geithner said there must still be some government role in housing in order to support multi-unit housing and rental housing. It needs to be targeted toward helping lower- to middle-income earners, he added.