The Obama administration nailed a "condemned" sign on the wrecked U.S. housing-finance system Friday but did not offer a clear blueprint for a rebuilding project that promises to take years.
The White House presented three long-term options. All envision reducing the government's market footprint, with private capital taking up the slack, and unwinding mortgage giants Fannie Mae and Freddie Mac.
Despite their key role in the 2007-2009 financial crisis, Fannie Mae and Freddie Mac still dominate the $10.6 trillion U.S. mortgage market, backing nearly nine of 10 new mortgages, along with the Federal Housing Administration.
The most drastic of the administration's three options would privatize housing finance almost entirely, with government insurance and guarantees limited to FHA and other programs for low- and middle-income borrowers.
A second option would add a government backstop mechanism to be activated during a crisis, while the third would include government reinsurance for some types of mortgages.
The administration is also calling for shorter-term steps that would raise the cost of government-backed mortgages to make private-sector capital more attractive, while reducing the huge loan portfolios of Fannie and Freddie.
With property markets fragile and the 2012 elections looming, consensus on an overhaul that analysts say will raise borrowing costs for consumers is likely to be elusive, leaving Fannie and Freddie to limp along for now.
"Realistically this is going to take five to seven years," Treasury Secretary Timothy Geithner told reporters on a conference call. He urged a tighter timetable for Capitol Hill to set a transition into law, suggesting a two-year deadline.
"Ultimately, we are going to have to explain to the market what the end-game is going to be and we can't wait too long to lay that out," Geithner said, adding that a mix of the three proposals could be the final outcome.
Congressional Republicans were generally upbeat about the plan, but ultimately consensus will be difficult to attain.
"I'm encouraged to see the administration included a number of reform ideas that track closely with my own," said Representative Scott Garrett, the Republican chairman of a House of Representatives panel that oversees the GSEs.
"We can all agree the status-quo is unsustainable and housing finance reform in the United States is way overdue."
The prospect of a diminished government role in the mortgage market lifted shares in private mortgage insurers, while borrowing costs for Fannie and Freddie fell a bit in anticipation that they would be issuing less debt.
BIG BANKS COULD BE WINNERS
Big banks could be helped by the overhaul if it lets them raise the prices they charge consumers for mortgages, while smaller banks that do a lot of business with Fannie and Freddie could suffer, said analyst Paul Miller of FBR Capital Markets.
Known as government-sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac were seized in 2008 by the Bush administration amid fears they could collapse. They have since sucked up $150 billion in taxpayer aid.
"What the administration offered today isn't a plan to move us forward, but rather a collection of options to consider ... We intend to sit down with administration officials to find common ground," said Representative Spencer Bachus, chairman of the GSE-overseeing House Financial Services Committee.
For a political compromise to happen, Senate Democrats will have to come to an agreement on any long-term solution with Republicans who took control of the House in January.
"We believe that the proposals will be just the beginning of the debate and that GSE reform is unlikely to be accomplished in 2011 or 2012," analysts for investment firm Keefe Bruyette & Woods said in a research note.
The GSEs' main job is to buy up mortgages that meet certain standards and then sell them to investors as securities to free up cash for lenders to lend again.
Democrats are generally more supportive of a government role in the mortgage market and argue that removing the federal backstop for mortgages would make loans more expensive and price many middle class Americans out of homeownership.
The housing industry, including real estate agents, homebuilders and bankers, support some government role for backstopping mortgages and have already started pushing back against some of the most aggressive privatization proposals.
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