Obama seeks new design for housing, Fannie/Freddie

WASHINGTON (Reuters) - The Obama administration called for "fundamental change" at Fannie Mae and Freddie Mac, but a long, politically explosive debate lies ahead on the future of the bailed-out mortgage giants and housing policy that affects millions of Americans and billions in investment.

U.S. Treasury Secretary Timothy Geithner on Tuesday raised basic questions about the government's long-standing role in subsidizing the $10.7 trillion housing market and supporting the historic "American dream" of home ownership.

Critically for both homebuyers and investors, he backed some form of government guarantee for mortgages. Geithner said a key question was whether the private sector could provide insurance or guarantees as part of a new home financing regime with enough safeguards to avoid another mortgage meltdown.

"It is not tenable to leave in place the system we have today," Geithner said.

"The challenge is to make sure than any government guarantee is priced to cover the risk of losses, and structured, to minimize taxpayer exposure," he told housing industry leaders at a conference convened by the Treasury almost two years after the government seized Fannie Mae and Freddie Mac to save them from collapse.

Since then, the two firms -- once lobbying heavyweights able to crush attempts at reform on Capitol Hill -- have received nearly $150 billion in taxpayer bailout money and have been placed in conservatorship, sharply restricting their past activities.

"We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support," Geithner said.

"We will not support a return to the system where private gains are subsidized by taxpayer losses."

The conference, including some of the mortgage sector's top lenders and investors, was billed as a "listening session" to help the administration develop an overhaul plan by January.

It comes amid signs of persistent weakness in housing markets -- an issue that could weigh on voters headed to the polls in November.

Housing starts rose in July from a downwardly revised level in June but the pace of new construction was much weaker than forecast and permits for future building fell to their lowest level in more than a year, according to a U.S. Commerce Department report on Tuesday.

"NO CLEAR CONSENSUS"-GEITHNER

"It's safe to say there's no clear consensus yet on how best to design a new system. But this administration will side with those who want fundamental change," Geithner said.

With Congress focused on elections in November, federal spending coffers depleted and nerves on edge about avoiding another housing crash, lawmakers looked unlikely to take on a housing finance overhaul until 2011, analysts said.

Enthusiasm in some quarters for removing government from housing finance was certain to collide with the political reality that housing subsides, such as the mortgage interest deduction, are deeply entrenched in U.S. economic life.

"It is clear that the government should continue to play a very large role in the housing market," said Mark Zandi, chief economist at Moody's Analytics and a conference participant.

At the same time, he said, "The housing market is, in my view, over-subsidized ... We're not getting our money's worth ... It's key for us to scale back the subsidies."

The problems and costs of Fannie Mae and Freddie Mac were not addressed in the sweeping Wall Street reform legislation approved by the U.S. Congress in July -- a yawning gap in the Democratic bill that Republicans have sharply criticized.

Bank and mortgage-backed securities investors are watching warily as the administration weighs options, ranging from full nationalization at one extreme to privatization with no government support at the other, and alternatives in between.

GUARANTEE ESSENTIAL-PIMCO'S GROSS

A government guarantee is considered essential to at least one major investor -- Bill Gross, co-founder of bond-trading firm Pacific Investment Management Co. He said that a government guarantee is needed to keep mortgages affordable.

"The concept of guarantees is crucial to the liquidity and to the cost of home financing," Gross said, calling it unrealistic to assume the private market could step in and replace Fannie Mae and Freddie Mac as providers of home mortgage liquidity. "It won't work," he said.

"Without government guarantees, mortgage rates would be hundreds -- hundreds of basis points higher, resulting in a moribund housing market for years."

Shaun Donovan, secretary of Housing and Urban Development, told the conference that the government's "footprint" in housing finance needs to be much smaller than it is today.

Fannie and Freddie and the Federal Housing Administration now back 90 percent of new U.S. home mortgages, he added.

The stubborn housing slump was likely to weigh on the minds of voters already concerned about a sluggish economy heading into November elections.

Across America, the average congressional district has more than 9 percent of its mortgages delinquent by 90 days or more, according to a study by Deutsche Bank. That's more than 2-1/2 times the delinquency rate on election day in 2008.

(Additional reporting by Lucia Mutikani, Dave Clarke and Emma Ashburn. Editing by Kristin Roberts and Andrea Ricci)