Geithner: Government Still Has a Role to Play in Housing

While Treasury Secretary Timothy Geithner pledged to reform the way Fannie Mae (FNM) and Freddie Mac (FRE) operate in the U.S. housing market at a packed hearing on Capitol Hill today, he also said that the two government sponsored enterprises have operated more prudently than much of the private housing finance market.

"The GSEs played a generally quite responsible role in... establishing standardized mortgage products, and generally they held to better underwriting standards than was true of the private market," Geithner said at a hearing held today by the House Financial Services Committee on how to reform the housing finance market.

Further, Geithner made it clear that the administration expects to continue a government role in guaranteeing housing finance in order to keep the housing market viable for middle class Americans.

"There will be some role for a guarantee of some sort," Geithner said.

But Still No Plan

The administration is not moving fast enough, some Republicans charged. "The reality is we still don't have a plan," Rep. Jeb Hensarling, R-Texas.

Geithner pledged to "take the best ideas" from both sides of the aisle to come out with a plan for reforming the GSEs.

Geithner also called for Congress to pass legislation that would provide $30 billion in small business lending through community banks, temporarily eliminate capital gains rates for small businesses, and allow faster expensing and depreciation for small businesses. The legislation "would make a big difference" in restoring credit to small businesses, which in turn would be able to create more jobs, he said.

Most representatives testifying at the hearing on behalf of private organizations also said government-backed guarantees of some sort are necessary for the housing markets. A fully private market is "not an option," said Vince Malta, vice president and liaison to government affairs for the National Association of Realtors.

Private lenders are not willing to make loans without government backing, he said. But taxpayers should not be on the hook, he said. NAR called for a new structure "that is not driven by the shareholders' need to maximize profits."

Fannie Mae's and Freddie Mac's structure was flawed because they had a "private profit and public loss structure," Malta said. A government-chartered structure is the best model because it could "focus on their mission, to provide liquidity to the housing market, without the need to chase risky opportunities in order to maximize profit," he said in his prepared testimony.

To protect taxpayers, the entity "should not be operated as if the government/taxpayers are in the first lien position," Malta said. "The entity should be self-sufficient, price risk effectively to cover potential losses, and utilize any profits to establish capital reserves to alleviate losses in economic downturns," he said.