Video - Geithner with Liesman - Feb. 11, 2011

Source - Bloomberg

U.S. Treasury Secretary Timothy F. Geithner presented Congress with a set of options for weaning the $11 trillion mortgage market from its dependence on the government, while calling for changes to be phased in “responsibly and carefully” to avoid economic disruptions.

The report delivered today by Geithner and Housing and Urban Development Secretary Shaun Donovan presents three approaches for a future housing finance system. It calls for the government to shrink “and ultimately wind down” Fannie Mae and Freddie Mac, the bailed-out government-sponsored enterprises that helped fuel the housing bubble before being felled by investments in subprime mortgages.

The transition to a new housing-finance system will likely take five to seven years, Geithner said during a conference call with reporters.

“I want to emphasize we’re going to proceed on this path to reform very carefully, so we make sure we’re supporting the process of economic expansion and repair of the housing markets, which of course are still suffering from the damage caused by the crisis,” he said.

The plan doesn’t endorse a particular long-term option or offer legislation. All three proposals would accompany an end of taxpayer support for Fannie Mae and Freddie Mac, which together have drawn more than $150 billion from the Treasury since they were seized by the government in September 2008.

Congressional Debate

In Congress, the report’s release is the opening bell for a political and policy bout over how to fix the mortgage-finance system, a debate that is likely to last months or years. Real estate brokers and developers have told lawmakers that the housing market dominated by Fannie Mae and Freddie Mac remains too fragile to survive a precipitous overhaul.

With the decline of private investment in home loans since the credit crisis, the two companies, along with the Federal Housing Administration, have come to own or insure almost 97 percent of mortgage bonds.

Geithner, who said the government took its support for housing “too far” heading into the credit crisis, said the administration of President Barack Obama can take initial steps without legislation and then will need lawmakers to step in.

“We don’t want legislation to be too far deferred,” he said at a conference in Washington today. “Ultimately we’re going to have to explain to the market what the end game’s going to be and we can’t wait too long.”

Meeting Commitments

Geithner said the federal government will continue to back Fannie Mae and Freddie Mac during the transition.

“We’re going to make it very clear to the market and to investors we will make sure Fannie and Freddie have the resources they need to meet all their commitments as they go through the process of reform,” he said on the call with reporters.

Though the administration envisions a smaller federal role in the mortgage market, the Federal Housing Administration should continue to support affordable housing, Donovan told reporters.

“FHA is a critical part of ensuring access and affordability for low-income Americans and we must continue that,” Donovan said.

The three options presented by Treasury suggest differing degrees of government involvement in the system. The most dramatic would largely privatize housing finance, leaving a government role to help “narrowly targeted” low-income buyers, rural residents and military veterans.

Get the details on the proposal at Bloomberg...