WASHINGTON (Reuters) - The United States should include in its budget the cost of mortgage loan guarantees and other housing supports, the International Monetary Fund said on Wednesday in a rare criticism of its biggest shareholder.
The IMF’s findings may land it squarely in the middle of a hot political debate over what to do about Fannie Mae and Freddie Mac, the mortgage finance giants that back most new housing loans.
The IMF also faulted the Obama administration for failing to address the tax deduction for mortgage interest, which it called “both expensive and regressive.”
The tax break is hugely popular, and eliminating it would no doubt cause political pain at a time when the Obama administration is already preparing for the 2012 presidential election campaign.
The IMF did say that the weak U.S. housing market still needs government guarantees for securitized mortgages, and abruptly removing those support could be damaging.
“However, government guarantees should be explicit and fully accounted for on the government’s balance sheet,” it said.
“There is a need for better-defined and more transparent government participation in the housing market, with all such policies, including strict affordable housing goals, transparently shown in the government’s budget,” it added.
The Obama administration has kept Fannie and Freddie off the budget, as did the Bush administration before it. Including them would make an already ugly fiscal picture look even worse.
The United States put those companies, which buy loans from banks and repackage them as securities for investors, into conservatorship in 2008 as the housing market bust led to massive losses on loans they guaranteed. The government has propped them up with more than $134 billion in taxpayer funds.
The U.S. Congressional Budget Office said in 2010 that Fannie and Freddie should be treated as government entities and counted in the budget, and many Republicans in Congress have pushed for that as well.
The IMF has generally tiptoed around direct confrontation on policy issues with the United States, which is its largest member and has effective veto power over any IMF decisions.
Overall, the Obama administration’s housing reform proposals were “headed in the right direction, although some concerns and challenges remain,” the IMF said.
The Fund said the reform efforts rightly focused on winding down Fannie and Freddie, adding the firms should be closed over the medium term to allow private-market securitization to return.
The private sector all but vanished from the mortgage-backed securities markets after the housing bust and financial crisis spawned hundreds of billions of dollars in losses. The government — through Fannie Mae, Freddie Mac and the Federal Housing Administration — now backs close to nine of 10 new residential mortgages.
The IMF’s recommendations were included in its Global Financial Stability report, released ahead of its spring meeting scheduled for mid-April.
“While an overhaul of the housing finance system will take years to complete, U.S. authorities need to step up their efforts now to develop and implement an appropriate action plan,” the IMF said.
Editing by Leslie Adler