Like it or not, it may be 2018 before we are fully free of Fannie Mae and Freddie Mac.
The Obama administration released a proposal Friday for restructuring the housing market. It lays out three paths to breaking the U.S. housing finance system’s toxic addiction to massive, untransparent government subsidies. Fannie, Freddie and the Federal Housing Administration currently finance more than 90% of mortgages.
But going from a heavily subsidized system to one that sharply limits taxpayer risk won’t be easy. Treasury Secretary Tim Geithner admitted in a call with reporters Friday that it is rather likely the Obama administration will be long gone by the time the next housing finance system, whatever it looks like, finally springs up in place of the current, deeply dysfunctional one.
“Realistically, this is going to take five to seven years,” Geithner said.
He said the shift would take place in three stages: First, in the next two or three years, the government will dial back its support for the housing market, through moves such as a reduction in the size of the loan Fannie and Freddie can buy. That so-called conforming loan limit was raised to $729,000 in some areas during the financial crisis but will fall to $625,000 Oct. 1 if Congress doesn’t extend the measure enabling the higher number.
The second stage, also taking two to three years in Geithner’s view, will “accelerate the pace of transition” to a privately financed market that offers government support for typical mortgage lending only through programs that put investors in the first-loss position on any default.
The third stage turns on whatever legislation Congress passes to create the system to replace Fannie and Freddie, whose bailout has cost taxpayers $153 billion since Treasury’s takeover of the companies in September 2008.
That is a long road, but the time to start is now, Geithner said. “The current system is untenable” and “fundamentally unacceptable,” he said at a question-and-answer session at the Brookings Institution in Washington.
Asked about the risk of laying out a process that will take so long to complete that it will likely span two presidential election cycles, Geithner pointed to the high stakes in supporting a housing market that is widely expected to resume its long decline over the next year or two.
“Any framework promising future virtue will suffer credibility issues, but this is really the only way you can do it,” Geithner said.
Also on Fortune.com: