The Obama administration nailed a 'condemned' sign on the wrecked U.S. housing finance system on Friday but did not offer a clear blueprint for a rebuilding project that promises to take years.
In a long-awaited move, the White House offered three big-picture options for overhauling a $10.6-trillion market that cratered in 2008, triggering a wave of home foreclosures and the worst banking crisis since the Great Depression.
All the alternatives sketched out in a 31-page white paper would unwind the troubled mortgage titans Fannie Mae and Freddie Mac and shrink the government's market footprint, in order for private capital to step in.
Short-term steps were also proposed to level the playing field between the publicly backed mortgage sector and the private market, which has been flat on its back for years, and to reduce the huge loan portfolios of Fannie and Freddie.
With property markets still fragile and the 2012 elections looming, political consensus on an overhaul could be elusive, leaving Fannie and Freddie to limp along for now.
Analysts said the changes would raise borrowing costs for consumers who are still wary of getting back into housing, potentially weakening property prices again.
Realistically this is going to take five to seven years, Treasury Secretary Timothy Geithner told reporters on a conference call. He urged Capitol Hill to get moving and 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 he unveiled could be the final outcome.
Despite their key role in the crisis, Fannie and Freddie -- known as government-sponsored enterprises, or GSEs -- still dominate the 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.
In the short-term, the administration called for phasing in higher prices for GSE guarantees, reducing the size of mortgages the GSEs can back and shrinking their portfolios at a rate of at least 10 percent a year.
Republicans were cautiously upbeat about the plan. Some housing activists worried about the impact on consumers.
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.
CONCERN OVER CONSUMER IMPACT
The Consumer Federation of America said the plan could threaten consumers' access to affordable mortgage credit ... shifting control of the mortgage market to Wall Street banks and investors whose previous missteps have already caused massive foreclosures and losses.
The prospect of a diminished government role in the mortgage market lifted shares in private mortgage insurers, while the GSEs' borrowing costs fell a bit in anticipation that they would issue less debt in the future.
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.
The proposals bolstered the $5 trillion in outstanding Fannie Mae and Freddie Mac mortgage-backed securities, led by big banks and foreign holders. Higher fees and interest rates in months or years ahead mean borrowers will be slow to pay down existing MBS, bringing relief to investors who face losses when bonds priced at a premium are repaid at face value.
The GSEs were seized in 2008 by the Bush administration amid fears they might collapse under bad debts built up during a massive U.S. real estate bubble. They have since sucked up $150 billion in taxpayer aid, which has made them a political liability for the administration.
The white paper distances the administration from the two unpopular GSEs. Economically, it could, if enacted, make home ownership and mortgage finance more expensive in the U.S., and that carries its own political risk, said Brian Gardner, analyst at investment firm Keefe Bruyette & Woods.
Legislation is unlikely to pass over the next two years but there are administrative moves that are likely to start having an effect sooner, he said.