Geithner backs reform of Fannie Mae and Freddie Mac

Treasury Secretary Timothy F. Geithner signaled his support Tuesday for reforming beleaguered mortgage finance giants Fannie Mae and Freddie Mac.

But in testimony before the House Financial Services Committee, he said that would require some form of guarantees to keep the government-sponsored enterprises afloat.

“Housing finance plays such a large role in our economy, and we are so vulnerable in it,” Geithner said before the committee. “There is a good case for a design of a carefully applied guarantee at the right price.”

The Treasury Department isn’t expected to release a detailed proposal for reform of Fannie and Freddie until later this year.

Geithner indicated that he opposed approaches that would either permanently nationalize the two groups or create new quasi-governmental corporations that would compete with each other.

“Neither of those two options look like appealing options,” Geithner said.

Instead, Geithner indicated that lawmakers should look at two approaches supported by Federal Reserve Chairman Ben S. Bernanke.

One would privatize Fannie and Freddie but continue to have the government provide some form of guarantees.

The other would restructure them into public utilities, with the government regulating profits, setting fees and providing guarantees for their assets.

“We need to preserve what was good and eliminate what was too risky,” Geithner said.

Republican lawmakers have criticized congressional Democrats and the Obama administration for failing to include reform of the two mortgage giants as part of a proposed broad overhaul of bank rules.

Key GOP members of the House committee want to see the federal government move in the direction of privatizing the two entities.

However, Democrats have been hesitant to make changes while the housing market remains in flux.

“I hope you follow the leadership of House Republicans and phase out federal credit privileges and taxpayer support and guarantee of Fannie and Freddie,” said Rep. Spencer Bachus (R-Ala.).

“It’s unacceptable that, more than 18 months after [they] were placed in conservatorship, the Treasury Department still does not have a plan for Fannie and Freddie.”

Orol writes for MarketWatch.com

/McClatchy