Fannie Mae and Freddie Mac would be totally eliminated to make room for an expanded role for private capital in the U.S. mortgage market, under a plan released today by a major centrist think tank.
The government would still play a limited role in guaranteeing mortgages under the proposal by the Bipartisan Policy Center's Housing Commission, but would not be involved in actually buying or selling mortgages or mortgage-backed securities, unlike Fannie Mae and Freddie Mac.
"The business model of these government-sponsored enterprises (GSEs) - publicly traded companies with implied government guarantees and other advantages - has failed and should not be repeated," the report read, referring to Fannie Mae and Freddie Mac.
While calling for an expanded role for private capital, the commission also says continued government involvement in the mortgage market is necessary to ensure that mortgages remain available and affordable for qualified homeowners.
An actual, not implied, government guarantee
To replace Fannie and Freddie, the report calls for the establishment of a "Public Guarantor" that would provide a limited guarantee for qualifying mortgages. Rather than a private corporation with an implied government guarantee, this would be a wholly government-owned operation and funded through fees on guaranteed loans.
The Public Guarantor would be in the "fourth loss" position, paying out its guarantees only after other capital is exhausted, specifically that of the actual borrowers and their home equity, private credit enhancers and the corporate resources of the mortgage lenders themselves.
The model is similar to that of Ginnie Mae, a government agency that handles securities backed by federally insured loans.
The report also calls for reforms of the Federal Housing Authority (FHA) to improve efficiency and make room for private capital in the mortgage market. It notes the government currently backs more than 90 percent of all mortgages, through Fannie, Freddie, the FHA and other government institutions.
Though Fannie Mae and Freddie Mac were originally founded by the federal government, they were eventually turned into private, for-profit corporations with no explicit government guarantee for their loans, although it was widely assumed the federal government would step in if they ever got into trouble. The federal government eventually took over both of them after they suffered staggering losses when the housing bubble collapses.
The Bipartisan Policy Center's Housing Commission is chaired by three former U.S. senators - Christopher S. "Kit" Bond, Mel Martinez and George Mitchell, a former senate majority leader and co-found of the Center. The fourth chair is Henry Cisneros, a former secretary of the Department of Housing and Urban Development, as is Martinez as well. Bond is also a former governor of Missouri.