In a long-awaited white paper, the administration said it intends to wind down the federal mortgage giants Fannie Mae and Freddie Mac and curtail the Federal Housing Administration to help reduce the government's outsized role in mortgage funding.

The housing finance system, which has ensured that Americans can get home loans, came crashing down in the financial crisis, helping fuel millions of foreclosures and the recession.

But in proposing a strategy for the future, administration officials acknowledged they are walking a tightrope. Any steps that too dramatically dial back government support too dramatically -- making mortgages more expensive -- could extend the housing decline.

Treasury Secretary Timothy Geithner said Friday morning that a new housing finance system without Fannie and Freddie could take seven years to put in place, suggesting it might fall in part to future administrations.

"We have to see the process of repair in the housing market completed," Geithner said in a conference call with reporters.

"I think it's absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing," Geithner said, noting that in addition to those fundamental mistakes, the government "allowed a huge amount of basic mortgage business to shift where there was no regulation or oversight."

The white paper focuses on a series of short steps to increase fees and downpayment requirements. The administration hopes these measures will allow banks to more effectively compete in offering loans without government guarantees.

The report offers three options for replacing Fannie and Freddie, rather than a single long-term vision for the housing finance system. By refusing to endorse one option, the administration may be able to avoid a contentious clash with Republicans, who view the companies as the chief culprit in the financial crisis.

Republicans are likely to agree with the administration's plan to reduce taxpayer support for mortgages.

The options include creating a new government agency that would continue to insure mortgages or a new agency that would step in only during times of crisis. Each, however, could put taxpayers at more risk of having to bail out the mortgage market during big declines.

The most drastic option would end government backing for home loans beyond the FHA. But the administration warned that this measure could affect access to credit for many potential homeowners. This option could boost mortgage rates the most, the officials said, and it could make it harder for community banks to compete in the housing market.

"I think there's an overwhelming case for moving the system gradually over time to a world where homeowners hold more equity in their homes, Geithner said Friday. "There are costs to doing that," Geithner said, noting that many small business owners traditionally have borrowed against the equity in their homes to get started. Higher equity could tempt risky borrowing.

To many Republicans and the Obama administration, Fannie Mae and Freddie Mac, are ill. But rather than healing them, both sides agree that the companies should be left to die and that their support for the housing market should wither away.

Some influential interest groups are taking issue with that surprising bipartisan consensus. They include small banks, real estate agents and consumer groups, who all say that Fannie and Freddie, or something similar, are crucial for sustaining the struggling housing market.

In the short term, the administration suggested a range of new measures to make government-backed mortgage more expensive - helping private-sector firms to better compete in offering mortgages.

These include reducing the size of mortgages Fannie and Freddie may purchase, from $729,750 to $625,500, by this fall. It would phase out the companies' 10 percent downpayment requirement. And it would raise fees that the companies charge to insure loans.

The administration also suggested scaling back the FHA, which caters to first-time homebuyers with low downpayment options. The White House said it wants to reduce the size of loans that FHA can provide, increase fees by a quarter percentage point, and raise the downpayment requirement from 3.5 percent to 5 percent in the future.

The report emphasized the importance of rental housing for low and moderate-income communities.

Senior administration officials said they would take gradual steps to avoid harming the already struggling housing market. But they said this plan laid the groundwork for the future of U.S. housing.

"This is a plan for fundamental reform - to wind down [Fannie and Freddie], strengthen consumer protection, and preserve access to affordable housing for people who need it," Geithner said. "We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market."

Mark Zandi, chief economist for Moodys.com, told CNBC that the Obama administration had "laid out a prudent, appropriate plan."

"At the end of the day, though, the government is going to have to play some role in a catastrophic backstop," he said.

www.washingtonpost.com/wp-dyn/content/article/2011/02/11/AR2011021102035_pf.html

Feb. 11, 2011