Lenders, Treasury See Possible 'Utility' Role for Fannie, Freddie

Washington-Declaring that the secondary mortgage market is '"broken," the Mortgage Bankers Association has formed a working group to explore what lies ahead for the industry in regard to Fannie Mae, Freddie Mac and related issues.

MBA's effort comes in the wake of departing Treasury Secretary Henry Paulson giving his views last week on what should be done with Fannie and Freddie which are currently operating under federal conservatorships.

The MBA is calling its group 'The Council on Ensuring Mortgage Liquidity' which includes residential, multifamily, and commercial executives.

The trade group says the Council's mission "is to look beyond the current crisis, to what a functioning market should look like for the long-term."

It issued a working paper that notes: "If investors or other market participants are not accountable for the risks they take on, they are prone to act irresponsibly."

Speaking before the Economic Club of Washington last week, Mr. Paulson did not endorse an idea for Fannie and Freddie, but suggested a 'public utility' model might be the best way to "resolve the inherent conflict between public purpose and private gain."

Mr. Paulson emphasized that the 'pre-conservatorship' structure of Fannie and Freddie is not an option for policy makers.

Until their takeover in September, Fannie and Freddie were publicly traded companies with Congressional charters that mandated they provide liquidity to the primary origination market by purchasing loans. Even though the two have not - as a technical matter - failed, they more or less have been nationalized. Mr. Paulson said the nation needs what he called a "vibrant private market" for mortgages, saying the government might want to "enhance" the ability of depositories to fund mortgages as a possible substitute to the GSEs.

He provided no details but discussed four options: expanding the role of FHA and GNMA in mortgages; creating a partial government guarantee for MBS issued by GSEs; completing privatizing the GSEs; and the public utility model where private sector money would be used to purchase and securitize mortgages (but not hold them).

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