UPDATE 2-Obama wants new model for Fannie, Freddie

* U.S. Treasury hosts forum for housing finance leaders

* Obama admin promises overhaul, but tough political task

* Geithner: Fannie, Freddie can’t go back to old structure

* Wall Street reform law did not tackle problem

* Housing woes could be issue in November U.S. elections
(Recasts with additional Geithner, Donovan comments)

By Kevin Drawbaugh and David Lawder

WASHINGTON, Aug 17 (BestGrowthStock) – 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 finance giants and U.S.
housing policy.

U.S. Treasury Secretary Timothy Geithner on Tuesday raised
basic questions with housing industry leaders about the U.S.
government’s long-standing role in subsidizing and supporting
the $10.7 trillion housing market.

“It is not tenable to leave in place the system we have
today,” Geithner said at a conference hosted by the Treasury
Department almost two years after the government seized Fannie
Mae (FNMA.OB: ) and Freddie Mac (FMCC.OB: ) to save them from
collapse.

Since then, the two firms 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, with some of the mortgage sector’s top
lenders and investors, is billed as a “listening session” for
the administration to gather ideas as it develops an overhaul
plan by January. No major changes are expected before 2011.

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

With Congress focused on elections in November, federal
spending coffers depleted and nerves on edge about changes that
could trigger another housing crash, lawmakers looked likely to
move slowly on overhauling housing finance, 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 facets of U.S. economic life.

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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.

Geithner said there is a strong case for a carefully
designed government guarantee for mortgages, and that a key
question will be whether the private sector can provide a form
of insurance or guarantee on its own.

“The challenge is to make sure than any government
guarantee is priced to cover the risk of losses, and structured
to minimize taxpayer exposure,” Geithner said.

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

Geithner also said government should reassess how it
promotes access to affordable housing.

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

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

SMOOTH TRANSITION NEEDED

Geithner stressed a smooth transition period so as not to
disrupt the fragile housing market. “As we go through this
transition, it is important that consumers maintain access to
credit at attractive rates,” he said.

Fannie Mae and Freddie Mac both jumped into subprime
mortgages during the housing boom in the early 2000s in an
attempt to broaden home ownership — with disastrous results.

Participants at the conference included executives from
Wells Fargo (WFC.N: ) and Bank of America (BAC.N: ), as well as
Lewis Ranieri, who helped develop the model for the private
mortgage-backed securities market that was central to the
housing bubble that burst in 2007-2008.

The conference occurred a day after U.S. home-builder
sentiment unexpectedly fell for a third straight month in
August to its lowest level in nearly 1-1/2 years, according to
a survey that added to evidence of slowing economic recovery.

ELECTION-YEAR ISSUE

A stubborn housing crisis is likely to weigh on voters
already concerned about a sluggish economy headed into November
elections.

Across America, the average congressional district has more
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 Dave Clarke, Emma Ashburn and Corbett
Daly; Editing by Neil Stempleman)

UPDATE 2-Obama wants new model for Fannie, Freddie