Confirmed: Fannie & Freddie will be the next president’s problemby Tim Manni
Back in February we postulated that the reform of Fannie Mae and Freddie Mac would be the next president’s problem (whoever that may be). Recent comments by Treasury Secretary Timothy Geithner made before Congress yesterday certainly back up our claims (emphasis added):
Each of the longer-term reform options we have outlined will require legislation from Congress, and we hope to work together with you and your colleagues to pass comprehensive legislation within the next two years.
Geithner’s statement merely relates to the passage of the legislation, not the implementation of the reform, which could take years in itself. This is one of the reasons why many of you have commonly heard of “five-to-seven-year plans.”
Geithner began his prepared testimony by both acknowledging the industry’s as well as the government’s oversights which led to the bubble and subsequent downturn:
For decades, the government supported incentives for housing that distorted the market, created significant moral hazard, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market. In more recent years, we allowed an enormous amount of the mortgage market to shift to where there was little regulation and oversight. We allowed underwriting standards to erode and left consumers vulnerable to predatory practices. We allowed the market to increasingly rely on a securitization chain that lacked transparency and accountability. And we allowed the financial system as a whole to take on too much risk and leverage.
The treasury secretary also went on to define the administration’s vision for their role in the markets moving forward:
We believe the government’s primary role should be limited to several key responsibilities: consumer protection and robust oversight; targeted assistance for low- and moderate-income homeowners and renters; and a targeted capacity to support market stability and crisis response.
The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit.
We are committed to a system in which the private market – not American taxpayers – bears the burden for losses.
Geithner’s testimony doesn’t really offer too many new nuggets of information or insight, but it does confirm the long road that’s ahead for this massive overhaul.