–Fully Nationalizing, Abolishing GSEs Not Appealing
–Not Envisioning System With No Government Role

By Yali N’Diaye

WASHINGTON (MNI) – It will likely take several months to review the
possible options for the future of Fannie Mae and Freddie Mac and
housing finance in general, but Treasury Secretary Timothy Geithner
ruled out some options Tuesday, including those that would give no role
to the government.

There is a “quite strong” economic and policy case for “continued
provision of a carefully designed guarantee by the public sector going
forward because housing market is so critical to overall economic
activity,” Geithner told lawmakers, adding such a guarantee would have
to be “appropriately priced.”

In a hearing on housing finance, Geithner also told the House
Financial Services Committee that abolishing Fannie Mae and Freddie Mac
or fully nationalizing the two mortgage giants is not the best way

And on whether the Federal Home Loan Banks can provide a good model
for housing finance reform, Geithner pointed out challenges raised by
this model as well, although he did not totally dismiss all of its

“I think the Federal Home Loan Banks system is not without
challenges today,” he said.

And when looking at the housing finance reform, Geithner added, one
must also look at the FHLB to make sure it can play the role it is
designed to play without leaving too much risk in the future that would
force the government to come to the rescue.

Taking such a broad look at the issue of housing finance in fact
will take months, Geithner anticipates, although not years.

“I think realistically it’s going to take several months to do a
careful exploration of the problems, solutions, alternative models and
to try to shape legislation that could command consensus,” he said.

“I think we are at the point now where we can start that process,”
he continued. “There is a huge compelling need to make sure we design a
successful system,” he added, noting, “We cannot afford to live with
that (current) model going forward.”

Barney Frank, the Committee chairman, added that given the
complexity of the housing finance system, simply abolishing Fannie Mae
and Freddie Mac is not enough.

It is as important to determine what will replace them, he said,
stressing the need to create new institutions that are ready to support
the housing market.

Whatever the outcome of the reform process, all parties agreed the
current combination — that Geithner described as “fatal” — of private
ownership and public objectives, should be abandoned.

But “a lot of challenges” remain on the road to reforming housing

Despite that, Geithner said the government wants to fix the
“damaged” housing market.

U.S. data released Tuesday further illustrated the damage done by
the financial crisis to the housing market.

The Federal Housing Finance Agency home price index fell 0.6% in
January and the National Association of Realtors reported a 0.6% decline
in existing home sales. Supply was up 9.5%, the worst inventory gain
from January to February in 20 years.

However, Fannie Mae and Freddie Mac actions today are key to
repairing the housing market, Geithner maintained.

He warned, however, that while the administration will keep working
to expand loan modification programs, the high rate of unemployment
means redefaults are “inevitable.”

** Market News International Washington Bureau: 202-371-2121 **

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