Though Treasury Secretary Tim Geithner said Tuesday that reforming the GSEs should not take years to accomplish, a House Financial Services Committee hearing made it clear the issue is unlikely to be addressed anytime soon.
Geithner offered no specifics on the future of Fannie Mae and Freddie Mac. Instead, he broadly endorsed some kind of government role in the housing market, even while he appeared uncertain how expansive it should be.
He also rejected the past GSE model, declaring that it was a partial cause of the current crisis and saying a total revamp is necessary.
"There is a quite strong economic case, quite strong public policy case for preserving [and] designing some form of guarantee by the government to help facilitate a stable housing finance market," Geithner said. "But it can't be the one we have today. It can't be the one we lived with over the last decade. It's going to be significantly different."
Geithner's timetable for reform appeared to be a long one. He repeatedly made it clear that the administration was only starting to examine the issue, and no concrete reform plan was in the offing.
"Realistically, it's going to take several months to do a careful exploration of the problems, solutions, alternative models, and to try to shape legislation that could command consensus," Geithner said. "But I don't see why this should take years. There's a huge compelling need to make sure we can design the successor system, and it's very hard … for anybody to argue that we can live the with the system as it is now indefinitely in the future."
House Financial Services Committee Chairman Barney Frank agreed that the effort had just started. "I stress this is the beginning of this process," he said.
That left many Republicans outraged. Several GOP lawmakers noted that it has been a year and a half since the government seized the GSEs — and said that to start work on a plan now was far too late. "It's unacceptable that more than 18 months after the GSEs were placed in conservatorship that the Treasury Department still does not have a plan for Fannie and Freddie," said Rep. Spencer Bachus, the panel's lead Republican. "Without reform, the bailouts will not stop, the housing market will not find its footing, and the American economy will not recover."
Rep. Bill Posey, R-Fla., appeared frustrated, telling Geithner, "We can't wait forever to find out" about the administration's plan.
Geithner attempted to reassure lawmakers that the administration did not intend to drag the process out. He insisted it had been busy responding to the financial crisis, and that it has to be careful that whatever plan it develops will not upset the still-fragile housing markets. The administration plans to publish a list of questions by April 15 seeking comment on the right role for the government in the housing finance system.
But Geithner also ruled out several alternatives that have been offered on the future of the GSEs. For example, he rejected both nationalizing Fannie and Freddie or splitting them into several smaller entities.
"I think the two options you laid out at the beginning — full nationalization or creating a whole new class of GSEs to compete with each other — those do not look like appealing options to me," Geithner said in response to questions from Bachus.
He also appeared to reject an idea being pushed by the Federal Home Loan banks to recreate Fannie and Freddie in the Home Loan banks' image. Unlike Fannie and Freddie, which were public companies that answered to shareholders but were chartered by the government, the 12 Home Loan banks are cooperatives owned by their member institutions.
Rep. Mike Castle, R-Del., noting that the Home Loan banks have fared better than Fannie or Freddie, asked Geithner if it was worth considering using them as a guide. "Using the Federal Home Loan bank model, is that something you could actually substitute for all this in terms of what we're doing or not doing as far as the future's concerned?" Castle asked. "They don't seem to have had the problems that the other GSEs have had."
Geithner responded that the Home Loan bank system "is not without challenge today." Still, he maintained that the Home Loan banks must be included in any revamp of the housing finance system. "When you look at the housing finance markets and reform of the GSEs, you have to look at the FHLB structure as well to make sure that it can play the role it's designed to play, again, without leaving us with too much risk in the future that the government's going to have to come in, to step in, to underwrite those losses," he said.
Geithner did say he would consider a model offered by former Treasury Secretary Henry Paulson to regulate the GSEs like public utilities.
But Democrats rejected attempts by Republicans to unwind Fannie and Freddie before a replacement system is in place. "You can't really tear down the old jail until you've built the new one," Frank said. "We will simultaneously, I hope, be figuring out how best to wind down Fannie Mae and Freddie Mac and make sure that before that is completed, we are ready to replace the functions they are now performing in the economy without leaving this great vacancy."
In September 2008, the government seized Fannie and Freddie and kept them afloat with $127 billion in federal aid. Reversing its original plan, the Obama administration pledged late last year to cover unlimited losses through 2012 for the enterprises, removing the earlier cap of $400 billion.
Republicans accused the administration of propping up the GSEs for its own purposes, including using them to support a program designed to increase loan modifications. "It appears to many of us … that what we now have is the GSEs are essentially an instrumentality of the administration to fund taxpayer funds to a failed foreclosure mitigation plan, with nothing else in sight," said Rep. Jeb Hensarling, R-Texas.
Rep. Randy Neugebauer, R-Texas, warned that the longer a new plan for Fannie and Freddie is delayed, the more dependent the housing market will become on a nationalized Fannie and Freddie, echoing a point made by many analysts.
"It's kind of like a muscle," Neugebauer said. "The doctors tell you the longer that you don't use a muscle and you keep your arm in a sling, which is where we got the housing finance market today, … the harder it is to rehabilitate that arm once you take it out of the sling."
Geithner said the administration was conscious of the need to act but said doing so too quickly could make things worse. "We do not want these markets dependent excessively on government support in the future," he said.
But he warned that in areas like housing that have been so badly damaged, "that process of repair is going to take a long time."