The Obama administration has gained plaudits from even conservative critics by calling for the dismantling of Fannie Mae and Freddie Mac. But a growing number of observers are arguing that one of the Treasury Department's proposed replacements is effectively the same system by another name.
Presented as option three in the administration's white paper outlining the possible future of housing finance, the government would create a reinsurance program that would guarantee mortgage-backed securities during a crisis.
But many observers said that — just like the current government-sponsored enterprise system — it would leave the taxpayer on the hook if the mortgage market blew up again.
"It doesn't take more than three and half seconds of reading that paragraph to realize that we are talking about another version of Fannie and Freddie," said Lawrence White, an economics professor at New York University's Stern School of Business. "Those institutions sound like, smell like, feel like, another set of Fannies and Freddies."
White was a member of the Federal Home Loan Bank Board during the savings and loan crisis. The FHLBB was a predecessor agency to the Office of Thrift Supervision.
Under this approach, a group of private mortgage companies would provide guarantees for MBS that met certain strict underwriting criteria. A government entity would then provide reinsurance to the holders of the securities, which would only be paid if shareholders were entirely wiped out. The government would charge a premium for its reinsurance that would be used to offset losses to taxpayers.
Supporters of the idea say option three is better than the current system because the government would guarantee only the MBS after the mortgage entities take losses, and would not backstop the entities' debt. In theory, the government's role would be reduced.
But some question whether those benefits would be realized, arguing the government would still be a big player in the mortgage market under this approach.
"It looks like option three to a certain extent is more of the same just in a different form," said Gil Schwartz, a partner in Schwartz & Ballen LLP. "They really haven't privatized the housing finance side by using option three, because the government ultimately provides the backstop in the form of reinsurer for these private mortgage guarantor companies. Isn't that adding a complexity to this thing that doesn't get the government out of the business?"
