Fannie Mae and Freddie Mac may not be going away anytime soon, but the mortgages they back are going to get more expensive over time.

Treasury Secretary Tim Geithner today reiterated the Obama Administration's determination to reduce the role of the government in the housing market and allow the pricing of Fannie Mae and Freddie Mac mortgages to gradually rise to private market levels.

He also reaffirmed that the administration is determined to wind down the two government-established lenders, which have dominated the U.S. residential mortgage market for 70 years, although gradually so as not to shock the fragile housing market into another downturn.

A major shift on affordable mortgages

That would mark a seismic, generational shift in policy for the federal government, which since the end of WWII has worked to ensure that home ownership is attainable for middle class Americans through affordable mortgage guaranteed at first by Fannie Mae and later by Freddie Mac as well.

"We are committed to a system in which the private market - not American taxpayers - bears the burden for losses," Geithner said, in prepared testimony before the House Financial Services Committee. "And while we believe that all Americans should have access to affordable, quality housing, our goal is not for every American to become a homeowner."

Geithner said government-supported mortgage incentives had distorted the housing market and left taxpayers on the hook for much of the risks incurred. He blamed a lack of regulation and oversight for allowing the financial system as a whole to take on too much risk in the years leading up to the market crash.

Fannie, Freddie shutdown could take years

Although Geithner stressed the administration's commitment to eventually closing down the two mega-lenders, it looks to be a slow process. He said the administration will seek to reduce their portfolios by at least 10 percent a year, meaning it could take a decade if the reduction is done in even steps.

He also expressed hope that Congress would enact long-term reforms within two years that would establish a new, reduced role in mortgage markets for the federal government. Any major efforts to shut down Fannie Mae and Freddie Mac would likely not be able to begin until then, although their activity could be gradually reduced.

Even as it is expressing its intent to reduce the government's role in the residential mortgage market, the administration is calling for greater support for those who rent their homes, especially low- and middle-income families. Geithner said the administration will seek to expand FHA lending for multifamily properties and provide adequate financing for affordable rental properties that private credit markets are generally reluctant to lend for.

Published on August 6, 2008