IMF urges US budget include Fannie, Freddie costs

By Emily Kaiser

WASHINGTON, April 6 (Reuters) – The United States should
include in its budget the cost of mortgage loan guarantees and
other housing supports, the International Monetary Fund said on
Wednesday in a rare criticism of its biggest shareholder.

The IMF’s findings may land it squarely in the middle of a
hot political debate over what to do about Fannie Mae (FNMA.OB: Quote, Profile, Research)
and Freddie Mac (FMCC.OB: Quote, Profile, Research), the mortgage finance giants that
back most new housing loans.

The IMF also faulted the Obama administration for failing
to address the tax deduction for mortgage interest, which it
called “both expensive and regressive.”

The tax break is hugely popular, and eliminating it would
no doubt cause political pain at a time when the Obama
administration is already preparing for the 2012 presidential
election campaign.

The IMF did say that the weak U.S. housing market still
needs government guarantees for securitized mortgages, and
abruptly removing those support could be damaging.

“However, government guarantees should be explicit and
fully accounted for on the government’s balance sheet,” it
said.

“There is a need for better-defined and more transparent
government participation in the housing market, with all such
policies, including strict affordable housing goals,
transparently shown in the government’s budget,” it added.

The Obama administration has kept Fannie and Freddie off
the budget, as did the Bush administration before it. Including
them would make an already ugly fiscal picture look even
worse.

The United States put those companies, which buy loans from
banks and repackage them as securities for investors, into
conservatorship in 2008 as the housing market bust led to
massive losses on loans they guaranteed. The government has
propped them up with more than $134 billion in taxpayer funds.

The U.S. Congressional Budget Office said in 2010 that
Fannie and Freddie should be treated as government entities and
counted in the budget, and many Republicans in Congress have
pushed for that as well.

The IMF has generally tiptoed around direct confrontation
on policy issues with the United States, which is its largest
member and has effective veto power over any IMF decisions.

Overall, the Obama administration’s housing reform
proposals were “headed in the right direction, although some
concerns and challenges remain,” the IMF said.

The Fund said the reform efforts rightly focused on winding
down Fannie and Freddie, adding the firms should be closed over
the medium term to allow private-market securitization to
return.

The private sector all but vanished from the
mortgage-backed securities markets after the housing bust and
financial crisis spawned hundreds of billions of dollars in
losses. The government — through Fannie Mae, Freddie Mac and
the Federal Housing Administration — now backs close to nine
of 10 new residential mortgages.

The IMF’s recommendations were included in its Global
Financial Stability report, released ahead of its spring
meeting scheduled for mid-April.

“While an overhaul of the housing finance system will take
years to complete, U.S. authorities need to step up their
efforts now to develop and implement an appropriate action
plan,” the IMF said.
(Editing by Leslie Adler)

IMF urges US budget include Fannie, Freddie costs