On mortgage rates, Obama wants proposal for how government can keep big role

Any effort to remake the nation’s housing finance system would be phased in over five to 10 years.

Since early in his tenure, Obama has promised to offer a proposal to overhaul the nation’s housing finance system.

In February, the administration released a long-awaited white paper discussing an overhaul of the housing finance system. The paper called for the end of Fannie and Freddie but did not say what should replace them.

Three options were presented. The first two called for greatly reducing the federal role in the mortgage market, perhaps eliminating it. A third option called for largely maintaining the government’s footprint but introducing several changes to reduce the chances that another taxpayer bailout would be needed. 

(All of the options preserved the Federal Housing Administration, a government agency that helps low- and middle-income and minority home buyers.)

The administration’s decision in February to release a series of options — and not make a formal recommendation — reflected a political calculation and a disagreement among Obama’s advisers.

Two top Obama advisers, HUD Secretary Shaun Donovan and Treasury Secretary Timothy F. Geithner, think the government should maintain an outsize role in the housing market, administration officials said.

Donovan thinks federal support for housing fulfills a public service, while Geithner has been focused on the need for the government to have a way to keep the mortgage market operating during a financial crisis.

Other advisers, however, opposed a continued government role over the long run. Austan Goolsbee, who this month left his job as chairman of Obama’s Council of Economic Advisers, argued that the federal role in housing distorts the free market. By subsidizing mortgage investments, he argued, the government drives capital away from other types of investments — for example, those in companies developing environmentally friendly technology. He also warned that the government is putting enormous sums of taxpayer money on the line while conveying little actual benefit to home buyers.

In a meeting with the president, Goolsbee said that the government had finally brought Fannie and Freddie’s excesses to heel by taking over the companies and that it would be a mistake to let them loose in the market again, said a person familiar with the meeting. Goolsbee likened the companies to a villain held in a special prison who shouldn’t be freed just because he promises to help the poor, the source recounted.

Lawrence H. Summers, who was director of the National Economic Council until early this year, argued that, over the long term, it didn’t make sense to have a government-backed agency providing guarantees to the mortgage market but that Fannie and Freddie still play a crucial role.

“My position was that we needed to maximize activity in the short run to support the housing market,” Summers said in an interview. “Discussions of scaling down Fannie and Freddie were vastly premature under the circumstances of a collapsing housing market.”

After a decade or so, he added, the government role might be phased out. He cautioned that models similar to Fannie and Freddie “were problematic because they were likely to lead to the same type of abuses” that Fannie and Freddie engendered.

Gene Sperling, who became director of the National Economic Council this year, shepherded the release of the white paper. He agreed that a continued government guarantee made sense.

In the end, Obama signaled agreement. The White House, however, says the president has not made a final decision.