From Tahman Bradley:
Treasury Secretary Tim Geithner spoke to Brookings Institution this morning about the set of options he presented to Congress about transitioning the U.S. mortgage market away from dependence on the government.
Specifically, he spoke about winding down Fannie Mae and Freddie Mac.
"We need to wind down Fannie and Freddy and substantially reduce the government's footprint in the housing market," Geithner said.
Geithner said it's important that Congress overhauls the mortgage market gradually because the government is now the dominant source of housing finance. "(We need to) make sure doing this doesn't impede the recovery of the housing market," he said.
Going forward all parties involved in the mortgage market must understand a new set of rules, Geithner said.
There must be clarity on what capital banks have to hold against mortgage risk, stronger stands so that homeowners are required to hold more equity in their homes, better protection for consumers, better incentives for securitization and clarification on risk retention.
The set of reforms, Geithner said," "have to be put out to the market to give investors and banks time to adjust to understand what will be the new economics of making mortgages in this country."
He said the Federal Housing Administration role should be limited; it should be supplemented with an emergency backstop that would only be deployed in crisis and available for a broader class of homeowner.
Geithner called on all the stakeholders in the housing market to study the proposals he's put forth.
"Those all have very different implications for the nature of the government's support for the vulnerability of the market in future housing crisis, future recessions," he said. "We think it's helpful for the broad set of stakeholders in the country and on the Hill to spend some time trying to fully understand the implications, the relative merits, the disadvantages of those mix of options."
Once Congress gets through its hearings on the Treasury Department's proposals, Geithner said, the administration will share thoughts on which "mix of views" make the most sense.
Many Republicans on Capitol Hill have called for an even quicker unraveling of the mortgage giants. They wanted a proposal to unwind Fannie and Freddie in the Wall Street reform bill that passed Congress last year. Geithner cautioned that the process should be slow and deliberate.
"We need to proceed carefully and gradually, not just because this is very complicated but – as you know we're still living with the traumatic damage scars caused by this recession, you see those still in housing most powerful. "
Asked if the government played to big a part in making mortgage loans more available in the years before the recession, Geithner said the government did indeed do too much.
"I think it's absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing. We just took that too far."