Will the Treasury's Mortgage Finance Plan Lack Courage?

Sometime in the next week or two, we will finally get the long awaited mortgage finance policy report from the Obama administration. About a year ago, when the financial reform battle was heating up, the Treasury said that it would delay its recommendations about how to reform the government's role in mortgages -- one of the central causes of the financial crisis -- until early 2011. But will this report provide meaningful reforms for long-term stability and sustainability of the U.S. housing market, or will the Treasury just punt to future administrations?

Unfortunately, a report from the Washington post by Zachary A. Goldfarb and Brady Dennis on Friday suggests that the Treasury's recommendations may only provide some weak short-term measures:

The administration is not expected to lay out a detailed blueprint for a new housing finance system, sources said. Instead, officials are expected to announce short-term steps to slightly reduce government support, such as by dropping loan limits. The administration's hope is that banks would feel more comfortable offering loans for higher-priced homes without government support.

Specifically, Treasury officials leaked to the Post that the government will likely lower the mortgage size that the government will guarantee slightly, from a maximum of $729,750 to $625,500, in high cost areas. Is this really the Obama administration's bold solution to reform the housing market and prevent future housing bubbles? Any proposal that doesn't offer significant long-term solutions would fail to address some of the central problems that led to the financial crisis. Weak short-term proposals would allow political uncertainty to continue to cloud the housing market.

To be sure, it would be irresponsible for the Treasury to propose an aggressive new policy to take effect in the short-term. The housing market continues to struggle and any additional stress will just make things worse. It must stabilize before it can endure any drastic change. But the Treasury could make suggestions of how housing finance policy should evolve over the next five to 10 years to ensure a healthier financial system.

If the Treasury's policy report does fail to provide a long-term vision, then it will be a sign that the administration isn't willing to take a firm stand. One of the biggest outstanding issues is what to do about the government-sponsored enterprises Fannie Mae and Freddie Mac. For decades, Congresses and Presidents haven't been willing to take on the GSEs. These companies have traditionally had a strong influence in Washington, and reducing the government's presence could upset the very powerful real estate lobby.

So will the Obama administration have the courage to recommend real change? It already delayed putting any housing reform into the big financial regulation bill passed last summer. Now it has a second chance. The President and his advisors have an opportunity to demonstrate that they really do stand for reforming politics as usual in Washington. Will they live up to the expectations they've set?