Stephen Foley: Government faces up to mortgage reform

US Outlook: The Obama administration is finally getting down to the great unfinished business of the credit crisis, namely the question of how to recast US government help for the mortgage market.

The two mortgage finance giants, Fannie Mae and Freddie Mac, have sucked up about $134bn of taxpayer funds since collapsing in 2008 and having to be nationalised. These companies were always a peculiarity in the supposed land of free markets, quasi-public institutions able to borrow at close to US Treasury rates, pushing down mortgage rates for most Americans.

The administration has been deliberately missing deadlines to come up with reform plans. Since coming into formal government ownership, Fannie and Freddie have become even more important props to the fragile US housing market. Now they buy or guarantee 90 per cent of all new home loans. The discussion document released by the US Treasury yesterday was refreshingly honest about why changes should only be phased in over a very long period. Any responsible reform will make credit less easily available than before the crisis, it says.

None the less, the principles set out in the document set the US on a course to phase out Fannie and Freddie and the across-the-board government subsidy for mortgage borrowers that they imply, without removing government from the mortgage market entirely.

The debate is over whether and to what extent the government should provide support for low-income or otherwise disadvantaged groups that want to get on the property ladder, and how the government should work to ensure the smooth functioning of the private mortgage market.

One of its proposals looks like a particularly good start point. It suggests a government insurance scheme for basic mortgages which would be rolled out during credit market contractions, and could be dramatically scaled up if there is a repeat of the credit crisis.

The US mortgage market needs government help today to protect against a downward spiral of housing market declines and economic woe. It will need it again in the future. It doesn't need it in between.