White House Weighs Changes To Fannie, Freddie
MICHELE NORRIS, host:
The Obama administration is rethinking the government's role in the housing market. From tax breaks on home loans to subsidized apartments, the federal government has long been one of the biggest boosters of the housing industry. Now, that support is getting a second look. In particular, the administration is trying to decide what to do with mortgage giants Fannie Mae and Freddie Mac. The government took over the failing companies nearly two years ago in one of its costliest bailouts.
NPR's Scott Horsley reports.
SCOTT HORSLEY: Treasury Secretary Timothy Geithner says the federal government has gotten a lot of suggestions about how to fix Fannie and Freddie, not all of them on the same page. Some people think the government has tried to do too much to prop up the housing market. Others believe it hasn't gone far enough.
Secretary TIMOTHY GEITHNER (U.S. Department of the Treasury): There's no clear consensus yet on how best to design a new system, but this administration will side with those who want fundamental change.
HORSLEY: The administration hosted a conference today to decide what that change might look like. Housing Secretary Shaun Donovan says everyone wants a healthier system to bankroll housing. The question, he says, is how to get there?
Secretary SHAUN DONOVAN (U.S. Department of Housing and Urban Development): And in answering that question, we need to ask ourselves what role the government should be playing in that market.
HORSLEY: Until their takeover, Fannie and Freddie played their role in a kind of twilight zone - for-profit companies owned by shareholders but with an implicit guarantee that the government would come to their rescue.
Alex Pollock of the conservative American Enterprise Institute stressed that was part of their problem.
Mr. ALEX POLLOCK (American Enterprise Institute): You can either, in my view, be a private company or a government agency, one or the other, but not both.
HORSLEY: Pollock would like to see the government play a much smaller role in the mortgage market, guaranteeing home loans, as Fannie and Freddie did, only for low-income buyers, leaving everyone else to the private sector.
Bond investor Bill Gross of PIMCO would go in the opposite direction. He wants to set up a single government agency to guarantee loans for everyone.
Mr. BILL GROSS (Pacific Investment Management Company, LLC): We've been dealt a significant blow and to suggest that the private market can come back in and take the place and do the same thing that they've done for the past 20 or 30 years is simply impractical. It won't work.
HORSLEY: Gross says without a government guarantee, his bond fund would not invest in mortgages, unless borrowers made a 30 percent down payment or paid significantly higher interest rates. President Marc Morial of the National Urban League says a lot of would-be homebuyers would be left out.
Mr. MARC MORIAL (President, National Urban League): One thing I don't want is a system where homeownership is available to a few, where only some Americans can afford - and then we create a class of renters.
HORSLEY: Lewis Ranieri, who helped pioneer mortgage-backed securities, says, for decades, Fannie and Freddie made safe, affordable mortgages available to a wide variety of borrowers. He says the trouble began around 2002 when private lenders started experimenting with much riskier loans, and Fannie and Freddie followed suit.
Mr. LEWIS RANIERI (Former Bond Trader): I think it was much more the profit motive than any political motive to expand homeownership. They lowered their standards, and they bought over $500 billion of the very loans that created the problem.
HORSLEY: Ranieri says the critical flaw was that implicit government backing. Fannie and Freddie paid nothing for it, and there was little government oversight. Treasury Secretary Geithner says there's a case to be made for an explicit government insurance policy but only if it's paid for, so taxpayers are not in the hook. Whatever the administration decides, economist Mark Zandi of Moody's Analytics thinks the government will continue to play an outsized role in the housing market.
Mr. MARK ZANDI (Economist, Moody's Analytics): Certainly, for the foreseeable future, our housing market, our mortgage market and the broader economy are just too fragile and is going to require that the government remains intimately involved in these markets for a long time to come.
HORSLEY: The administration's plan for reforming Fannie and Freddie is due out early next year.
Scott Horsley, NPR News, Washington.
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