* Democrats and Republicans want to replace mortgage giants
* No quick action from Congress expected in election year
By Margaret Chadbourn
WASHINGTON, April 23 In considering how to fix
the ailing U.S. housing market, Republicans and Democrats in
Washington have found a rare point of agreement: they would
prefer life without failed mortgage giants Fannie Mae
and Freddie Mac.
But even with agreement that the system is broken, it is
unlikely Congress will soon tackle the mammoth task of winding
down two entities that have cost taxpayers more than $150
billion since their bailout in September 2008. Fannie and
Freddie now support about 60 percent of all new U.S. home loans.
Already, lawmakers have taken tentative steps to scale back
Fannie Mae and Freddie Mac's involvement by reducing the size of
loans that they can guarantee. Republicans and Democrats have
unified behind preserving affordable homeownership.
But more dramatic actions could be politically treacherous
in an election year. Home buyers still rely on the government
backstop in nine of 10 new mortgages, and the fragile market
must be weaned slowly from its dependence on federal programs
providing financial backing.
Changing the present system might prove hard for lawmakers
who are wary of risking harm to the housing recovery. Some would
fear alienating the deep-pocketed housing lobby and various
consumer groups rallying around the issue.
"There's not a politician out there who is willing to take
the risk of proposing something with a short transition period
that would potentially be blamed for cratering the housing
market," said Douglas Elliott, a Brookings Institution fellow
and former investment banker.
The Obama administration will release an updated plan in
coming weeks that is expected to further define its goals for
the federal government's role in the housing finance system,
according to sources familiar with the matter.
The administration in February 2011 offered three big-picture
options for overhauling the mortgage market.
One would be to eliminate federal involvement altogether,
but most experts say this could upend the housing market.
Another option creates a system that would help some types
of low-income and veteran buyers and also provides an expanded
guarantee the government would offer mostly in times of
A third would include government reinsurance for some types
of mortgages, but only if lenders first purchased a guarantee
from a private insurer.
The administration has not endorsed a legislative plan at
this point, but continues to consider these options, according
to a U.S. Treasury official.
NEW HOUSING SYSTEM?
Susan Wachter, real estate and finance professor at the
University of Pennsylvania's Wharton School, believes the time
may have come for "testing the withdrawal of a fully federalized
"It's untenable for the U.S. to continue on a path in which
we rely on a federal housing finance system," she said.
But with the November elections looming, congressional
action could be elusive, leaving the two government-run firms to
limp along under federal conservatorship.
"Anywhere we move from here in terms of supporting the
housing market will be more expensive, so politically there will
be pushback - which means there is a danger that we will settle
in with the existing system for many years," said Elliott.
It could take years to construct a new housing system that
would preserve some of the benefits of Freddie and Fannie,
including making home ownership affordable. The entities do not
issue mortgages; they buy loans and repackage them for sale to
investors as mortgage securities, with a guarantee in case a
"Nobody is suggesting that we downsize the
GSEs(government-sponsored enterprises) overnight. We have always
said that it will need to happen over time," said U.S.
Representative Scott Garrett.
Garrett, a Republican member of the Financial Services
Committee, has taken a lead role on housing reform in the U.S.
House of Representatives. He has offered a handful of bills in
the House, aiming to end taxpayer support of the GSEs and wind
down the companies that helped fuel the housing bubble before
collapsing under investments in subprime mortgages.
The U.S. Senate, meanwhile, has shown little inclination to
take up the issue any time soon.
Treasury Secretary Timothy Geithner this month said the
United States is lagging on reform of the housing finance
system, which he called the "biggest source of unfinished
business in the financial reform effort."
In February 2011, Geithner predicted it could take five to
seven years to transition to a new housing-finance system.
Garrett argued that Geithner "has shown absolutely no
interest in trying to figure out a future for housing finance
and resolve what will happen with Fannie and Freddie. It just
hasn't been an important item on his agenda."
Investors still haven't shown that they can do without a
government guarantee, said Lawrence Yun, the
chief economist for the National Association of Realtors.
Yun said that relying on big financial institutions to
insure mortgages and provide less government support could
result in restricting capital and threatening market stability.
Realtors and community bankers have lobbied to maintain a
strong federal role.
"Without the government backing the residential mortgage
market could be subject to a potential credit freeze and
mortgages might not be available, which I don't think elected
officials want to see," said Yun.
"Given the mistakes by Fannie and Freddie - trying to chase
after wild profits in the boom years - to restrain them is
understandable. But one has to consider is what worked with
Fannie and Freddie and what didn't," he said.