“Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained,” Geithner said in testimony prepared for the House Financial Services Committee that was obtained by Bloomberg News. The hearing is scheduled for today at 10 a.m. in Washington.
Geithner said the Treasury Department and the Department of Housing and Urban Development will issue a request for comment by April 15 on how to overhaul the U.S. housing-finance system and its regulatory structure. The government needs to make sure there is “no ambiguity over the status or allowable activities of any private entity which enjoys any benefits or protections from the government,” he said.
At the same time, Geithner pledged that the Obama administration would seek to avoid disruptions in the market for Fannie Mae and Freddie Mac’s debt and mortgage-backed securities. He said investors should not doubt the U.S. government’s commitment to backstop the obligations of the two companies, which have been in conservatorship since 2008.
“It should be clear that the government is committed to ensuring that the GSEs have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations,” Geithner said. “The administration will take care not to pursue policies or reforms in a way that would threaten to disrupt the function or liquidity of these securities or the ability of the GSEs to honor their obligations.”
The testimony expands on Geithner’s call yesterday for a “fresh, cold look” at the government’s role in housing. In a speech at the American Enterprise Institute in Washington, the Treasury chief said he is “looking forward to reforming” the government-sponsored enterprises — or GSEs, as Fannie and Freddie are known — even though that process has been put off while the Obama administration focuses on priorities including a financial regulatory overhaul.
The administration’s delay in offering its plan for Fannie and Freddie has drawn criticism from Republican lawmakers who are already critical of President Barack Obama’s approach to toughening financial oversight.
Representative Jeb Hensarling, a Republican from Texas, said yesterday that the administration should explain why it has “no exit strategy” from its 2008 takeover of the two mortgage- finance companies.
Geithner said in his prepared testimony for today’s hearing that the government had “few viable alternatives” to its extensive support of Fannie Mae and Freddie Mac because the two companies are so central to the housing market. Private capital isn’t available in sufficient strength to fund the mortgage market and make credit widely available, he said.
Before the government stepped in, the two companies guaranteed more than $5 trillion in residential mortgage-based securities, or almost half of the U.S. residential mortgage market, Geithner said. They also had more than $1.7 trillion in outstanding debt, held equally by foreign and U.S.-based investors, he said.
The Treasury in December said it would provide as much support to the GSEs as needed over the next three years. At that time, the Treasury also eased its requirements for the two companies to shrink their portfolios.
Geithner said the Treasury is still “firmly committed” to shrinking the firms in the long run. He also reiterated that the two companies are unlikely to exceed previous projections on government assistance.
“Neither company was near the previous $200 billion per institution limit in December, and neither is likely to exceed those caps even under a range of very conservative assumptions,” Geithner said.
The Treasury secretary laid out broad objectives for weighing how to change Fannie Mae and Freddie Mac, along with other housing organizations such as the Federal Home Loan Banks and the Federal Housing Administration. He said there are “a variety of mechanisms” the government could use to promote stability and also provide subsidies to parts of the market.
The housing finance system needs to have incentives that are aligned to encourage the mortgage industry to work toward long-term health instead of short-term gains, Geithner said. Private gains shouldn’t be allowed when the public bears the brunt of losses, and mortgage finance companies should be required to hold sufficient capital and avoid abusive practices.
Mortgage products should be standardized and support a liquid secondary market, with a broad base of investors and “accurate and transparent pricing,” Geithner said. Government housing policy should aim to promote widely available mortgage credit, financial stability and affordable housing options for lower-income households, he said.
“Action is needed to ensure that markets are more stable, consumers are protected, credit is widely accessible and important housing policy objectives, such as affordable housing for low and moderate income families, are administered effectively and efficiently,” Geithner said. “Government has a key role to play in that new system, but its role, and the role of the GSEs in particular, will be fundamentally different from the role played in the past.”