Regulator urges U.S. Congress to act on mortgage finance overhaul

WASHINGTON, March 19 Tue Mar 19, 2013 3:38pm GMT

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WASHINGTON, March 19 (Reuters) - The regulator of housing finance firms Fannie Mae and Freddie Mac told lawmakers on Tuesday they need to reduce or eliminate the government's near total support for the mortgage market to open the door for private capital and lay the ground for a healthier market.

The two companies, which help finance about two-thirds of new U.S. home loans, have been operating under government control since 2008. Their bailout has cost taxpayers $131 billion.

Both Republicans and Democrats agree they need to eventually be wound down, but have yet to agree on what should replace them.

"The U.S. housing finance system cannot really get going again until we remove this cloud of uncertainty and it will take legislation to do it," the regulator, Federal Housing Finance Agency Acting Director Edward DeMarco, told the House of Representatives Financial Services Committee on Tuesday.

"While FHFA is doing what it can to encourage private capital back into the marketplace, so long as there are two government-supported firms occupying this space, full private sector competition will be difficult, if not impossible, to achieve," he said.

Many Democrats believe the government needs to continue playing some role in the mortgage market to help ensure broad access to credit, and a number of private proposals also envision keeping some type of federal backstop in place.

"I have been observing a developing 'consensus' among private market participants that the conforming conventional mortgage market cannot operate without the American taxpayer providing the ultimate credit guarantee for most of the market," DeMarco said.

"That clearly is one policy outcome, but I do not believe it is the only outcome," he said. "I believe it is possible to rebuild a secondary mortgage market that is deep, liquid, competitive, and operates without an ongoing reliance on taxpayers or, at least, a greatly reduced reliance on taxpayers."

Fannie Mae and Freddie Mac do not make loans, but they buy them from lenders to foster a liquid market. They either hold the loans in their own portfolios or repackage them as securities for investors, which they issue with a guarantee.

After years of losses, both companies have returned to profitability and are now set to return earnings to the U.S. Treasury, which in turn could dampen the political motivation to shutter them.

In a filing with the Securities and Exchange Commission last week, Fannie Mae said it would miss its March 18 deadline for posting quarterly results as it analyzes how to account for certain deferred tax assets, which are unused credits and deductions that can be used to cover future tax bills.

The filing raised the possibility the company could soon be required to send as much as $62 billion to the U.S. Treasury if it begins to account for the assets as part of its net worth.

In the filing, Fannie Mae said the deferred tax assets may have a "material impact" on its 2012 financial statements and result "in a significant dividend payment" to the Treasury.

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