Geithner: Government Support for Mortgages Still Needed

By:
Kirk Haverkamp | August 17, 2010

Saying that it’s time to “begin the process of weaning the markets away from government programs and make room for the private sector to get back into the business of providing mortgages,” Secretary of Treasury Tim Geithner this morning opened a conference focused on overhauling the way home purchases are financed in America. 

That overhaul apparently will not include distressed secondary lenders Fannie Mae and Freddie Mac, with Geithner saying the “planned wind down” of the mortgage portfolios of the two government supported lenders should be done carefully.  
 

A need for a government guarantee?

 
At the same time, he indicated there is still a role for government to play in the mortgage market, saying a strong argument can be made for a “carefully designed guarantee” by which the government provides access to mortgages, even in economic downturns.
 
Today’s Conference on the Future of Housing Finance brings together a variety of experts on housing finance to provide imput for the development of a comprehensive housing finance reform proposal that the Obama Administration plans to present to Congress early next year. A key emphasis will be on supporting a vigorous housing market while avoiding the problems that led to the recent financial crisis.
 
“Today we consider the challenge of how to build a more stable housing finance system,” Geithner said in his opening remarks. “Fixing this system is one of the most consequential and complicated economic policy problems we face as a country.”
 

Support for affordable rates

 
Geithner said the most fundamental question is the proper role of the government in the housing market, both during times of prosperity and economic crisis. Basically, he said, it comes down to whether the government should provide some sort of guarantee to ensure that Americans can borrow at reasonable rates, even in a crisis.
 
“The policy question is to what extent the private market can provide that form of insurance or guarantee on its own, or whether this is fundamentally a role for government,” he said.
 
He said that the financial crisis, where private financial institutions effectively withdrew from many types of mortgage and consumer lending, provides a compelling illustration of why private markets have difficulty resolving financial crises on their own.  
 

Guarantees should reflect risks

 
He said the challenge is to make sure that any guarantee provided by the government (such as the investor insurance currently provided by Fannie Mae and Freddie Mac) is correctly priced to cover the risk of losses and minimizes possible costs to taxpayers.
 
He said one of the major problems that worsened, but did not cause, the financial crisis was that Fannie Mae and Freddie Mac, following the lead of the private sector, guaranteed increasingly risky mortgage products without accurately assessing that risk or pricing guarantees to reflect that risk.
 
At today’s conference, Geithner and HUD Secretary Shauan Donovan will moderate a pair of panel discussions on various aspects of housing finance reform. Panelists will include banking executives, leading economists, consumer advocates, private mortgage insurers, investors and other stakeholders and experts.

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