Treasury Department rolls out plan to dissolve Fannie Mae, Freddie Mac

The Obama administration announced it wants to shrink the government’s role in America’s home mortgage system.

Finally.

The Treasury Department last week rolled out a plan to dissolve Fannie Mae and Freddie Mac, the quasi-sponsored agencies that buy up mortgages to encourage more lending, and resultantly required a whopping $150 billion taxpayer bailout after the housing bubble began its collapse in 2008. (The bill could eventually top $250 billion.)

The administration would leave it to Congress to choose among three options to create a housing finance system that restores a far larger role for private bankers.

The two agencies currently buy mortgage loans from primary lenders, pool them and sell them with a guarantee that investors will be paid even if borrowers default. This tends to hold mortgage rates down, but also to encourage home sales to marginal buyers.

Mortgage rates would climb and home sales would fall, though that would have an upside, according to Joseph Murin, a former president of Ginnie Mae, the government-owned corporation that guarantees bonds backed by home mortgages: People who can’t afford houses would be less likely to buy them. Removing those buyers from the market could cause home prices to fall, helping first-time buyers.

In other words, the air would finally be let out of the bubble. A real correction could proceed.

The administration deserves loud cheers for charting a course to remove government interventions from the housing market, leveling the bubble-and-bust cycle with which we’ve become all too familiar.

But why then did Treasury Secretary Timothy Geithner say last week the plan would probably not happen for at least five years, and would then proceed “very carefully”?

Noted Karen Shaw Petrou, who advises banks on government policy for Federal Financial Analytics, “When the administration stops talking task forces and begins to flesh this out, you’ll see significant private capital injected into the mortgage market.”

Great! So why wait five years? Do it now.