Acknowledging that fundamental reforms are needed, Treasury Secretary Timothy Geithner this week opened discussion on the future of the two failing firms that are propping up the U.S. mortgage industry.
Fannie Mae and Freddie Mac backed more than 90 percent of new mortgages during the first half of this year. And yet they are on the edge of collapse, sustained by a government bailout that has cost taxpayers nearly $150 billion.
At a conference of the future of these government-backed enterprises, Geithner called for a bipartisan plan for reform. Both Democrats and Republicans bear responsibility for their problems, he said, and all share an interest in an efficient and strong mortgage market.
Like investment banks and private mortgage companies, Fannie and Freddie faltered as the housing market weakened, and credit markets failed under the weight of subprime mortgage loans.
The government-sponsored corporations promote home-ownership by acquiring loans and packaging them as mortgage backed securities. According to the Associated Press, they currently hold or back more than $5 trillion in mortgages.
There are some who believe that private markets could readily fill the gap if Fannie and Freddie were shut down, but even bankers are skeptical. At Tuesday’s conference, executives said banks and investors simply aren’t willing to move boldly back into the risky business of mortgage lending.
The government corporations must remain on life support long enough to allow for an orderly transfer of their obligations to a new custodian. Fannie and Freddie will eventually be laid to rest, but it should be accomplished in a way that does not put housing markets at risk.
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