WSJ: Government's twisted logic on lending

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"The government was complicit in easy lending standards and lack of regulation in driving up a huge housing bubble," said Anthony Sanders, a professor of real-estate finance at George Mason University, in Fairfax, Va. "Since the government caused quite a bit of the trouble, to say, 'See, you need us,' it's twisted logic."

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WASHINGTON—Treasury Secretary Timothy Geithner sketched out the administration's case Tuesday for some type of continued, if limited, government guarantee of home mortgages.

Nick Timiraos talks to Simon Constable & David Weidner about the future role the federal government is likely to play in the mortgage market, including the future roles of Freddie Mac and Fannie Mae. Plus, analyzing today's market rally.

The private sector's "full retreat" from the mortgage market over the past three years provides a "compelling illustration" of what would happen without some government role, he said.

Mr. Geithner's remarks to industry executives and academics at a housing-finance conference offered the clearest indication yet that the administration's working plans to reinvent mortgage giants Fannie Mae and Freddie Mac—and the entire mortgage-finance system—will almost certainly include some role for government.

The Obama administration has said it would unveil a detailed proposal by January. Tuesday's meeting, which kicked off the debate, was part college seminar and part political theater. It could help offer the administration a shield against complaints of foot-dragging as the two-year anniversary of the government takeover of Fannie and Freddie approaches next month. The event could also help build broader support for the White House's approach.

The mortgage-finance debate will be highly contentious because it requires a re-examination of just how much the U.S. government should subsidize homeownership.

"America has been over-housed," said Bill Gross, an executive at Pacific Investment Management Co., one of several private-industry speakers at the event.

For all the generous subsidies afforded to housing and mortgage markets, "we're not getting our money's worth," said Mark Zandi, chief economist of Moody's Economy.com.

At the heart of the debate is whether the U.S. should continue to promote a low-cost, 30-year, fixed-rate mortgage, which often requires some type of government guarantee to make investors willing to buy mortgage-backed securities.

Such long-term loans are extremely popular with consumers, and economists believe the rates on the mortgages would be higher if it weren't for government backing. The administration's support for a government guarantee underscores its preference for a housing-finance system where 30-year, fixed-rate loans are readily available.

Getting the government out of the mortgage market will be difficult. Including Fannie, Freddie and government agencies such as the Federal Housing Administration, the government backs nearly nine in 10 new loans.

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Treasury Secretary Timothy Geithner prepares to speak at a conference Tuesday in Washington on the future of housing finance.

The conference offered few specifics on many of the thorny questions that remain, such as how guarantees might be structured or provided.

Some critics, including those who support moving to a fully private market, chafed at Mr. Geithner's narrative.

"The government was complicit in easy lending standards and lack of regulation in driving up a huge housing bubble," said Anthony Sanders, a professor of real-estate finance at George Mason University, in Fairfax, Va. "Since the government caused quite a bit of the trouble, to say, 'See, you need us,' it's twisted logic."

Republicans, meanwhile, have called on the U.S. to wind down Fannie and Freddie quickly, but haven't outlined a specific road map for what would take their place.

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Mr. Geithner called the effort to rebuild the U.S.'s broken housing-finance system a test for Washington, and he called on Republicans and Democrats to work together.

"The failures that produced the system we have today were bipartisan. The solution must be as well," Mr. Geithner said.

Fannie and Freddie failed, he said, due to a "toxic combination" of a perceived government guarantee and ineffective oversight. While they weren't the sole causes of the housing bust, "they made the financial crisis worse," he said.

The Obama administration has already committed $148 billion to keep Fannie and Freddie afloat.

Write toNick Timiraos atnick.timiraos@wsj.com