The U.S. mortgage finance system should be revamped, government guarantees should be clearly defined and risk priced accordingly, Treasury Secretary Timothy Geithner plans to tell Congress on Tuesday.
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 delivery to the House of Representatives Financial Services Committee.
Geithner's comments mark a first step in what is expected to be a long process of overhauling the way U.S. homes are financed and puts the future of mortgage finance giants Fannie Mae
Geithner's predecessor, Henry Paulson, in 2008 effectively nationalized the two entities, which own or guarantee about half of all U.S. residential mortgages.
Prior to the government takeover of the two companies in the midst of the financial crisis, Fannie Mae and Freddie Mac enjoyed a quasi-public status that allowed them access to cheap capital, which in turn boosted their profits.
Geithner made it clear that hybrid status would not return for the two companies, known as government-sponsored enterprises (GSEs).
Clearly the governance structure of the GSEs in the past, in particular the unhealthy combination of private ownership and implicit government support, proved to be a mistake, Geithner said.
The Treasury chief said any effort to overhaul the housing finance system should ensure that mortgage credit is widely available and should promote affordable housing, consumer protection and financial stability.
And any new system aiming to achieve those goals should have a diversified investor base, accurate and transparent pricing, secondary market liquidity and clearly defined goals and objectives.
In the interim, Geithner said there should be no uncertainty about Uncle Sam's commitment to support Fannie Mae and Freddie Mac as they continue to play a vital role in the housing market during the current crisis.
Geithner said the administration intends to develop a comprehensive reform proposal for Congress to consider and would seek public comment over the coming weeks for recommendations and best practices.
Though he did not specify when that proposal would be unveiled, Geithner in the past has said such a proposal would not be unveiled until 2011 at the earliest. Both houses of Congress would have to approve any changes to the system before the president could sign it into law.
Geithner's comments come as the Senate Banking Committee on Monday approved a massive overhaul of the U.S. financial regulatory reform structure, pushing a fight over the issue to the full Senate in April.
But the regulatory reform legislation does not include changes to Fannie Mae and Freddie Mac, and Republican members of the panel are expected to grill Geithner on that point.
(Reporting by Corbett B. Daly; Editing by Kenneth Barry and Steve Orlofsky)