A major mortgage association is urging lawmakers to transform troubled lenders Fannie Mae and Freddie Mac into smaller, privately held companies that would issue mortgage securities with a government guarantee.
The proposal by the U.S. Mortgage Bankers Association is just one of a series of options that could be considered for Fannie and Freddie, which face major overhauls of their businesses after being seized by regulators worried the companies were near collapse.
Most observers expect Washington to scrap the model that put Fannie Mae and Freddie Mac in the hands of investors but left the companies with a congressional mandate to lower the cost of homeownership.
The following scenarios, gleaned from comments by policy-makers and analysts, examine a number of possible options for the two mortgage lending giants.
This might be the easiest option to implement and would return the companies to their origins as a government tool to nurture the housing market.
Shareholders only have had a stake in Fannie Mae and Freddie Mac for about 40 years. Before that, the companies were fully owned and guaranteed by Washington.
Under the current conservatorship, which could last for years, Fannie Mae and Freddie Mac are effectively in government hands again. Policy-makers may choose to hold that status quo and formally eliminate investors' interest in the companies.
PRIVATIZATION WITH PAYMENT FOR INSURANCE
Policy-makers might return the companies to investors and offer to insure Fannie Mae and Freddie Mac investments.
Washington could charge the companies a fee to underwrite their debt and some of their mortgage securities as a way to nurture the housing finance sector without standing squarely behind the companies. This idea, aired by Federal Reserve Chairman Ben Bernanke, would be akin to the Federal Deposit Insurance Corporation's protection of banks.
COOPERATIVES WITH LOOSE GOVERNMENT TIESFannie Mae and Freddie Mac could be run by the companies that sell them home loans. In such a cooperative arrangement, Fannie and Freddie would focus on long-term, stable business rather than maximizing profits. The federal government might still offer to insure the companies against the most catastrophic losses....MORE