US unveils reforms of housing sector that sparked 2008 crisis

Feb 11, 2011, 14:39 GMT

Washington - The US Treasury Department on Friday proposed dramatically reducing the government's role in housing as part of a much-anticipated reform plan for the sector at the centre of the 2008 financial crisis.

The plan would wind down government-backed lenders Fannie Mae and Freddie Mac, which were placed in receivership by the Treasury in September 2008 and have cost the US taxpayer about 150 billion dollars.

Fannie and Freddie guarantee about two-thirds of all home mortgages in the United States. Treasury Secretary Timothy Geithner said the goal of the reforms was to put the private sector back in control of the housing market and making loans to consumers.

Geithner said the Treasury would introduce a number of measures that would encourage private banks to 'fill the gap left by a receding government.' The government would move forward 'very carefully' to avoid a severe shock to the still-fragile housing sector.

'This is a plan for fundamental reform of the housing market,' Geithner said in a conference call with reporters. He said the entire process would take five to seven years, and many of the proposed reforms would have to be approved by Congress.

President Barack Obama's administration has ruled out the idea of the government getting out of the housing business altogether, with Housing Secretary Shaun Donovan saying the government would still play a role in offering home loans to low income Americans.

Fannie and Freddie played a major role in the run-up to the 2008 financial crisis, taking excessive risks in the home mortgage market, in part because they could rely on an implicit government guarantee of all their mortgage loans.

A collapse in housing prices sparked a record number of foreclosures by homeowners that led Fannie, Freddie and a series of private banks to the brink of collapse in late 2008. Lending by banks has remained constrained ever since, holding back the US economic recovery.

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