Obama administration's plan to gradually dissolve ailing housing giants Fannie Mae and Freddie Mac and to shrink the government's role in the mortgage market drew praise from House Republicans on Tuesday.
The GOP chairman of the House Financial Services Committee called the proposal a good starting point for bipartisan negotiations over a housing overhaul.
The positive reaction came as Treasury Secretary Timothy Geithner told the committee that the Obama administration wants Congress to approve legislation within two years that would slowly dismantle Fannie and Freddie. Failing to do so would worry the financial markets by leaving serious problems unresolved, he said.
“Our hope is Congress will work with us to find a consensus for a long-term solution,'' Geithner told the lawmakers.
The hearing was held three weeks after the Obama administration released a report calling for a stark reduction of the federal role in housing. The nation's housing market has been battered in recent years by low home prices and vast numbers of foreclosures, and politicians from both parties want to find a way to have private lenders, not the government, bear more of the burden.
“You don't want to run a system where the taxpayer is on the hook when things go bad,'' Geithner said.
Even so, there is no consensus, even among members of the same party, over precisely what to do. And it is unclear whether major legislation such as this could be approved during the approach of next year's presidential election, when partisan divisions intensify.
Fannie and Freddie guarantee or own about half of all U.S. mortgages. Along with other federal agencies, they played a role in nearly 9 of 10 new mortgages over the past year, as private lenders have remained nervous about making new loans. The two companies nearly collapsed in 2008 as the housing market crumbled, but have been kept alive with $150 billion, so far, in taxpayer dollars.
The administration thinks the ultimate cost of that bailout will be $70 billion to $75 billion or less, Geithner said.
In a written statement aides distributed at the hearing, committee Chairman Spencer Bachus, R-Ala., said Republicans are ready to sit down with administration officials “as soon as possible to craft legislation to produce a comprehensive housing finance reform plan.''
Rep. Scott Garrett, R-N.J., another member of the committee, also noted the common ground between Republicans and the administration's plan, including the phase out of Fannie and Freddie and the move toward a privately financed mortgage system.
“I believe there is an opportunity for us to reach broad based consensus,'' Garrett said.
As part of its plan for slowly eliminating Fannie and Freddie, the administration wants to lower the size of mortgages they can buy and raise the fees it charges _ proposals designed to help private lenders move back into the mortgage market.
That produced criticism from lawmakers from New York and Los Angeles, who said the lower limits would hurt homeowners in their high-priced districts.
“I don't know if you create a double-dip recession nationwide, but you certainly do in many areas,'' said Rep. Brad Sherman, D-Calif.
While both political parties concede that changes are needed to protect taxpayers and revive private lending, Republicans tend to want to move more strongly while Democrats express more concerns about maintaining the government's role in helping lower-income families.
Rep. Melvin Watt, D-N.C., said he'd only found “one sentence'' in the administration's report about helping low- and moderate-income homeowners. And Rep. David Scott, D-Ga., said Fannie and Freddie have helped blacks facing discrimination get mortgages.
“There is a role for government here,'' Scott said.
To wind down Fannie's and Freddie's roles in the market, the administration also wants to take steps for which it does not need congressional action, such as decreasing the size of loans the two companies may buy. Geithner also reiterated administration plans to constrict the Federal Housing Administration's role in making loans, which he has conceded will drive up housing costs.
“The cost of a mortgage is going to be higher in the future,'' Geithner said.
The administration's report offered three options for overhauling Fannie and Freddie. One would limit the government to helping poor and middle-class borrowers through agencies like the FHA. The second would have the government back private mortgages, but mostly during times of economic crisis. The third would give it the broader role of reinsuring some mortgage investments that are already guaranteed by private insurers.
Geithner refused to be pinned down on which option the administration prefers, at one point saying, “You could in fact envision a mix of those three options of being the best place to land.''
Fannie and Freddie buy mortgages from banks and other primary lenders, package them together and sell them with a guarantee that investors would be repaid in case of default. That system helps keep interest rates lower and provides lenders with fresh cash for additional loans.