Mortgage finance giants Fannie Mae and Freddie Mac will not exist in their current form after a revamp of the U.S. housing finance system, a top Obama administration official said on Tuesday.
Private gains will no longer be subsidized by public losses, capital and underwriting standards will be appropriate, consumer protection will be strengthened and excessive risk-taking will be restrained, said Michael Barr, Treasury Assistant Secretary for Financial Institutions.
Barr made the comments in prepared testimony, obtained by Reuters, to be delivered on Wednesday to the House Financial Services Subcommittee on Capital Markets.
Congress is in the midst of a debate about how to restructure Fannie Mae and Freddie Mac, which have together taken about $150 billion in direct government aid since they were seized two years ago amid mounting losses by then-Treasury Secretary Henry Paulson.
Current Treasury Secretary Timothy Geithner summoned leaders from the mortgage industry to Washington last month to discuss their future.
The administration has promised to lay out by January its vision for the two firms, which buy residential mortgages to free up lenders to lend again.
The two firms were created by Congress and any changes to their long-term structure would have to be approved by lawmakers.
Some Republicans want to eliminate Fannie Mae and Freddie Mac and the shape of any new system depends on which party is in control of Congress.
Ruling Democrats face substantial losses in the November 2 mid-term elections as a 9.6 percent unemployment rate weighs on voters.
Barr reiterated that the U.S. Treasury was standing behind the two firms.
The government is committed to ensuring that the GSEs (government sponsored enterprises) have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any debt obligations, said Barr, who is seen as a possible choice to head the new Consumer Financial Protection Bureau.
In separate testimony, the firms' independent regulator questioned whether a new U.S. housing finance system should have an explicit government guarantee for home mortgages.
Replaci1ng the enterprises' 'implicit' guarantee with an explicit one does not resolve all the shortcomings and inherent conflicts in that model, and it may produce its own problems, said Edward DeMarco, acting director of the Federal Housing Finance Agency.
DeMarco's comments were posted on the panel's website before Wednesday's hearing.
It is reasonable to question whether all conventional mortgages warrant a government guarantee, DeMarco said in his testimony, adding that calls for a clear government backing of mortgages have grown louder in recent months.
DeMarco said the premise for an explicit guarantee is that the private markets are not able to price the risk of mortgage default at reasonable levels on its own, but we might ask whether the government could do a better job.
If the government backstop is underpriced, taxpayers eventually may foot the bill again, DeMarco said.
(Reporting by Corbett B. Daly; Editing by Padraic Cassidy and Andrew Hay)