Financial Services - Call for Careful Overhaul of US Mortgage Lending - CNBC

The US does not intend to wind down completely Fannie Mae and Freddie Mac, the large government-sponsored mortgage companies that are eating up billions of taxpayer dollars, given the fragile state of the housing market.

Administration officials say that any credible proposal to overhaul the government-sponsored enterprises, as Fannie and Freddie are called, would need to include a “thoughtful approach” to prevent house prices from dipping lower.

Fannie [FNMA 0.3755 0.0005 (+0.13%) ] and Freddie [FMCC 0.4 --- UNCH (0) ] buy or guarantee more than 90 percent of loans currently being issued.

Without government backing, some large investors have said they would stop buying mortgage bonds, a development that would be catastrophic both for the housing market and the broader economy.

The overhaul of Fannie and Freddie remains one of the most challenging problems of the financial crisis, and one that was noticeably absent from the reform regulation signed into law earlier this summer.

Pressure is building on the Obama administration, which has promised to submit a proposal to Congress by January, to find a solution.

Since being taken over by the government in 2008, Fannie and Freddie have absorbed nearly $150 billion in aid, making them by far the costliest part of a bail-out that rescued carmakers and financial institutions.

The Treasury has been canvassing a wide array of private sector bankers and public policy experts, many of whom are listed to speak at a conference tomorrow, which will be chaired by Tim Geithner, Treasury secretary, and Shaun Donovan, the secretary for housing and urban development.

Treasury officials have been reading more than 300 comments received in response to seven questions posted earlier this year in a public forum.

No one wants to see the GSEs survive in their current form, but neither do they want to upset the mortgage market at such a crucial time. Beyond that there is little agreement on how to proceed.

Conservatives argue that the private markets, not the government, should provide financing for home loans. But liberals say the government should have some role. They point out that the private markets seized up during the credit crisis.

“It’s clear there is no good short-term solution,” said Rajiv Setia, of Barclays Capital.

Last month Mr Geithner promised that an overhaul of Fannie and Freddie would bring “fundamental change” and that they would not survive “in anything like their current form”.

But he added: “I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.”