Treasury Secretary Tim Geithner says the government intends to slowly wind down the role of housing giants Fannie Mae and Freddie Mac, eventually ending federal support for most U.S. housing loans. Under the plan, the $1.5 trillion support system would fall by 10 percent a year, according to a Treasury report.

The recommendations from Treasury have to go before Congress, but the fundamental message is for politicians to enact a slow death for the agencies, which were at the center of the housing boom and bust. The two companies were nationalized in the 2008 crisis and have drawn in $150 billion in taxpayer money so far to stay afloat.

The companies still guarantee 97 percent of U.S. mortgage bonds.
Consequently, Geithner admits, the cost of a loan will go up. “Over the long run, the cost will rise modestly for Americans to own a home,” Geithner told CNBC in an interview.

Tim Geithner

Treasury recommended that an FHA loan cost 25 more basis points and that the ceiling on so-called jumbo loans gradually fall from the current $729,750.

Geithner says that the target is for Congress to approve one of several plans or a mix of them, all with the aim of gradually reducing federal support for home lending while not risking the housing recovery.

“This is going to take time and we’re going to do it carefully,” Geithner said.

Asked if there is support from politicians to wind down Fannie and Freddie, Geithner said that “there’s more consensus now not just to wind down” the government-sponsored entities but also “for Americans to own more and for banks to be less reliant” on taxpayer support for home lending.

The three options break down like this: A totally privatized system with no government backing; a moderate amount of support for veterans and the poor; and a system that is close to what exists now with some reforms.

In a taste of what might be to come for a completely private home-lending market, Bill Gross of bond giant Pimco last year said that his company wouldn’t touch bundled home-loan bonds lacking government protection — unless the borrowers had made at least a 30 percent downpayment.

Americans were encouraged to buy homes with as little as 3 percent down during the boom, and sometimes nothing at all. Loans were routinely approved with 5 percent or 10 percent down and no proof of income.

“To suggest that there’s a large place for private financing in the future of American housing finance is unrealistic,” Gross told The New York Times then.