WASHINGTON - 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, said three people briefed on the discussions.
Treasury Secretary Timothy Geithner has said that a recommendation for winding down the two taxpayer-owned mortgage companies could be released in coming weeks.
In timing its proposal, Treasury must balance political and economic realities. Presidential campaign politics and deep divisions between Democrats and Republicans make it unlikely that mortgage-finance overhaul will be enacted this year.
Yet 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 nearly $190 billion in taxpayer aid.
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 US residential mortgages. That has prompted the real estate industry to lobby Congress to move slowly on reducing the government’s role.
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.
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 a 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.’’
Treasury staffers are also examining bipartisan legislation introduced in Congress, said the people, who spoke on condition of anonymity because the discussions are private. One bill would create a government-run “secondary market facility’’ for residential mortgages to replace Fannie and Freddie. A second would replace them with privately capitalized entities that would purchase government backing for the mortgage bonds they issued.
Geithner has stressed that any Treasury plan will aim to shrink the government footprint in housing finance.