The Obama administration wants to scale back the federal government's role in the mortgage market. But officials say they will have to move slowly to avoid causing more trouble for already weak home sales.
The administration released a report Friday suggesting three options for replacing the government-run mortgage giants Fannie Mae and Freddie Mac. All three are likely to result in higher borrowing costs and bigger down payments for would-be homebuyers.
The administration is determined to phase out Fannie and Freddie. The mortgage giants nearly collapsed during the financial crisis and had to be bailed out by taxpayers at a cost of more than $130 billion so far. What the government hasn't decided is what should replace Fannie and Freddie.
Treasury Secretary Timothy Geithner says whatever role the government ultimately plays in the mortgage market, it will be smaller than it is now.
"The way we describe this is we're going to drive west. Everybody wants to go west. We sort of know where we're going to go. But somewhere around Salt Lake City we'll make a choice about what mix of ultimate options," he said.
The administration is offering three possible roadmaps with varying levels of government support for mortgages. The more support, the more widely available mortgages will be. But that also means a greater risk for taxpayers.
John Courson, president of the Mortgage Bankers Association, says even with the most generous government guarantee contemplated, home loans will be harder to come by than in the past.
"Even today we're seeing for consumers a tighter credit box; it's more difficult for consumers to get mortgage loans and to qualify. But the other side is we need to get away from an idea that home ownership should be a certain percentage," Courson said. "Home ownership has to be sustainable."
Administration officials dismiss the charge, leveled by some Republicans, that affordable housing goals were a driving force in Fannie's and Freddie's problems. But Geithner acknowledges the United States has been too focused on housing, which is one reason the government wants to scale back its role.
"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," he said. "We just took that too far."
While scaling back support for home loans, the administration wants to see more support for rental housing, though it hasn't decided how to go about that. Housing and Urban Development Secretary Shaun Donovan says too many renters now pay too much of their income to their landlords.
"We need to rebalance our national housing policy," he said. "We have been too focused on home ownership, at the exclusion oftentimes of rental housing."
None of these changes is likely to come quickly. Thanks to the financial crisis, the federal government now bankrolls nine out of 10 new mortgages. And any sudden drop in support could imperil the housing recovery.
Ultimately, officials say, phasing out Fannie and Freddie is likely to take between five and seven years.