Mortgage giants may be replaced

Washington - U.S. Treasury officials are leaning toward recommending that Fannie Mae and Freddie Mac be replaced with a government safety net for the mortgage finance system and continued federal backing for loans to lower-income homebuyers, according to three people briefed on the discussions.

Treasury Secretary Timothy Geithner has said in recent public appearances that an agency recommendation for winding down the two taxpayer-owned mortgage companies could be released in coming weeks. It hasn't yet been determined whether the plan, likely to be a broad outline rather than a detailed prescription for legislation, will be released that soon, the people said.

In timing its proposal, Treasury must balance political and economic realities. Presidential campaign politics and deep divisions between Democrats and Republicans in Congress make it unlikely that mortgage-finance reform will be enacted this year. At the same time, the lack of a clear blueprint is contributing to continued weakness in the housing market, said Karen Dynan, a former economist with the Federal Reserve Board of Governors.

"The uncertainty surrounding the future of the mortgage finance system has impeded the rebound of the housing market and the private housing-finance market," said Dynan, now a vice president at the Brookings Institution. "It's just really hard for the players to make decisions when you don't know what the rules are going to be in the future."

The two companies, which veered toward bankruptcy when the housing market collapsed in 2008, were seized by regulators and have drawn almost $190 billion in taxpayer aid. Fannie Mae and Freddie Mac became targets of at least 18 Republican bills seeking to reduce or eliminate the government role in mortgages.

The debate over the companies' future has been complicated by their growing prominence in the housing market. As private investors have pulled back in the recession, Fannie Mae and Freddie Mac have come to own or guarantee 60 percent of outstanding U.S. residential mortgages. That has prompted the real estate industry to lobby Congress to move slowly on reducing the government's role.

"There's a lot of ideological chest-pounding about getting the government out of housing, but I think most people recognize that if it's done in any precipitous fashion, it will have negative consequences for the American homeowner, consumer and economy," said Jim Millstein, Treasury's former chief restructuring officer, who is now chairman and chief executive officer of Washington financial advisory firm Millstein & Co.

Mitt Romney, the leading contender for the Republican presidential nomination, has criticized Fannie Mae and Freddie Mac and has called for more private capital in the mortgage market, but has not released specific plans.

While some Republicans who initially called for immediate abolition of Fannie Mae and Freddie Mac now say they would accept a gradual wind-down, split party control of Congress stands in the way of resolving the matter in 2012.

"The political environment is dysfunctional," Michael Barr, a University of Michigan law professor and former assistant Treasury secretary for financial institutions, said in an interview. "The presidential campaign is taking up all the oxygen. There's almost no appetite for compromise on anything substantive."

Geithner more than a year ago unveiled three options for weaning the mortgage market from its government dependence. He said in February that he expected to "lay out more detail" about the approach "in the spring."

While a Treasury official said all options remain under review, the people familiar with the talks said the third option-the one with the largest government role-most closely resembles what the Obama administration is likely to propose.

Under that system, the government would supply "assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital," according to the Treasury report released in February 2011. Private companies could insure mortgage bonds, with the government paying out to bondholders only after shareholders were "entirely wiped out."