Lew Says Treasury Plays Role in Senate Housing-Finance Talks

Treasury Secretary Jacob Lew said his agency has been involved in a bipartisan Senate effort to overhaul U.S. housing finance while retaining a government backstop for mortgages in the event of a financial crisis.

“In the Senate you have a bipartisan effort which we’ve been engaged in the conversations over,” Lew told Bloomberg Television’s Peter Cook, referring to a bill introduced in June by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat.

Lew’s comments, to be broadcast on Bloomberg Television’s “Capitol Gains” on Sunday, represent Treasury’s first public acknowledgment of its role in congressional efforts to reshape the nation’s housing finance system after the 2008 credit crisis. President Barack Obama has declined to put forth its own plan for fear of subjecting it to a partisan fight.

Treasury has also been in talks with Senators Tim Johnson, the South Dakota Democrat who leads the Banking Committee and Mike Crapo of Idaho, panel’s top Republican, on another housing finance bill that they are writing.

“They’re looking for a way to accomplish goals that very much reflect our goals,” Lew said.

Those goals include limiting taxpayer risk, getting private capital back into the mortgage markets and maintaining access to credit for worthy borrowers, he said.

Timothy F. Geithner, Lew’s predecessor at Treasury, released a white paper in February 2011 outlining three options for winding down and replacing Fannie Mae and Freddie Mac, the U.S.-owned mortgage financiers. The options ranged from near-complete privatization to a system in which the government would serve as a catastrophic reinsurer of mortgage securities, with private capital taking most of the up-front risk.

Treasury Blueprint

Treasury and the Department of Housing and Urban Development have been working on a blueprint that would most closely mirror the option with a catastrophic government guarantee. The Corker-Warner bill broadly reflects the approach of that blueprint, which hasn’t been made public.

“There are details in all these proposals that are going to require more work, and we’re going to have to scrutinize, but that reflects the principles that the administration has laid out,” Lew said.

The Corker-Warner bill would require private capital to take at least 10 percent of the first losses on mortgage securities. It would allow the government to step in with more aid during a financial catastrophe, a measure Treasury pressed for, Corker said yesterday.

‘Emergency Piece’

“One of the things we did all the way through was to deal with the administration,” Corker said during a discussion on the bill at the Bipartisan Policy Center in Washington. “They had some expertise that obviously we don’t have directly on our staffs, and that countercyclical piece, that emergency piece, was something that they care deeply about.”

In the House, Republicans have drafted a bill that would wind down Fannie Mae and Freddie Mac with no government-backed replacement. Written by Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, the measure would leave the Federal Housing Administration as the sole U.S. mortgage backstop. No Democrats are backing the legislation.

“If you contrast what the conversation is in the Senate to the conversation in the House, it’s kind of interesting that one is a bipartisan conversation and the other is not,” Lew said. “This is going to require a bipartisan solution, and we look forward to being a part of it.”