The House Committee on Financial Services (HCFS) held a meeting today to figure out how to reform the housing finance system and potentially wind down the mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Testifying before the committee, Timothy Geithner, the secretary of the US Treasury Department said while conservatorship of the government-sponsored enterprises (GSEs) by the Federal Housing Finance Agency (FHFA) was necessary, there needs to be a process of fundamental reassessment and reform. “Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained,” Geithner said. While Geithner said the Obama administration is committed to ensuring that the GSEs have enough capital to meet any of their debt obligations and perform under any guarantees issued in the future, he reported that a plan to phase out government involvement is in development. “Government’s role in the housing finance system and level of direct involvement will change, however, and the Administration is committed to encouraging private capital to return to the housing finance market,” Geithner said. “The substantial direct support for the housing markets that has been put in place will be allowed to fade as the market recovers and fully stabilizes.” The alleged mismanagement of the GSEs in the past raises questions of how regulators will separate responsibilities to oversee industry soundness and consumer protection. Earlier in the month, Senator Christopher Dodd (D-CT), chairman of the Senate Banking Committee, introduced a new bill to Congress that would establish the Consumer Financial Protection Agency (CFPA). Under the bill, the Federal Reserve, already in charge of looking after bank stability, would play a role in housing the CFPA. Geithner urged the Committee that a separation of these two responsibilities is vital to a healthy housing financial system in the future. “We are now living with the consequences of a system that for many, many decades gave bank supervisors the responsibility to write and enforce rules for consumer protection, and that system did a terrible job for the country. It did a terrible job of protecting consumers, and it did not do an adequate job of protecting the safety and soundness of the banks in our country,” Geithner said to the HCFS. When pressed on the issue by Committee members, Geithner added: “You want bank supervisors worrying about risk management, about capital, about liquidity. You want them focused on those core things. You don’t want them having to spend a bunch of time also having to worry about consumer protection if that job can be better done by an independent agency,” Geithner said. But the committee brought up the argument of conflict. What if the regulators of the industry and the GSEs conflict with rules of those governing consumer protection? “If there is any risk of conflict, you can deal with that risk by making sure you have a body that looks at conflict and can pass judgement. But I think that it’s very unlikely that there would be any conflict,” Geithner answered. Geithner testified that the Obama administration will develop a “comprehensive reform proposal” to be delivered to Congress. To ensure input from stakeholders, the Treasury and the US Department of Housing and Urban Development (HUD) will submit a list of questions to market participants by April 15, 2010. Write to Jon Prior.