Seven Ways to Fix Fannie Mae and Freddie Mac

Private Investor Intervention

Fairholme Capital Management would privatize Fannie Mae and Freddie Mac's mortgage guarantee businesses and create two newly capitalized entities that issue privately insured mortgage-backed securities. The plan will work regardless of whether Congress decides to provide some form of a government guarantee for mortgage-backed securities. Most observers consider the Fairholme plan dead on arrival because it would be a very opportunistic private sector play. However, hedge fund manager Bill Ackman (pictured) has stepped up his purchases of GSE stock and Pershing Square Capital Management LP currently controls nearly 10% of Fannie and Freddie stock. This move could put more pressure on the GSE regulator and Treasury Department to negotiate or face a long legal fight. Photo: Bloomberg News.

Keep Fannie Mae and Freddie Mac, but Shrink Them

Fannie Mae and Freddie Mac are showing signs of long-term profitability so why make major changes? The GSEs could continue to support the secondary market and gradually reduce their investment portfolios and risks to the taxpayers with a few tweaks. Their regulator, the Federal Housing Finance Agency, has already done this to some extent through risk-sharing and portfolio reductions that could continue without the need for new legislation. Critics fear this fails to do enough to mitigate the kind of systemic risk Fannie Mae and Freddie Mac took on during the most recent downturn. Image: Fotolia.

The Corker-Warner Bill

A bipartisan bill sponsored by Sens. Bob Corker, R-Tenn., (pictured, left) and Mark Warner, D-Va., (pictured, far right) would create a new federal regulatory agency that would oversee the secondary market and require private MBS issuers to take a first loss position. This agency would also provide government-backed insurance to protect MBS investors from catastrophic losses and utilize a cooperative structure. This bill has support among Senate Banking Committee members. The ranking members of the committee (chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho) are reworking the Corker-Warner bill to attract broader support on the Senate floor. Johnson and Crapo might release a draft or committee print of their bill by the end of this year. A committee markup of the bill is not expected until next year. Photo: Bloomberg News.

The Protecting American Taxpayers and Homeowners Act

The PATH Act approved by the House Financial Services Committee provides no guarantees on conventional loans or MBS that Fannie and Freddie currently guarantee. Rep. Jeb Hensarling, chairman of the House Financial Services Committee (pictured), introduced the legislation earlier this year and passed the committee with no Democratic support. House leaders have benched the bill because they are concerned too many Republicans would side with the housing groups and vote against the Hensarling bill. Photo: Bloomberg News.

The Bipartisan Policy Committee Plan

The commission recommends a model similar to Ginnie Mae, where approved lenders are the issuers of mortgage-backed securities. It has some parallels with the Corker-Warner bill. Only mortgage-backed issuers would have access to the securitization platform. There is concern in both models about how much access smaller players would have in the market. Image: Fotolia.

The Federal Reserve Bank of New York Plan

This private lender cooperative model for residential mortgage finance would lead to more conservative and cooperative lending, according to Joseph Tracy, executive vice president and special adviser to the president, Federal Reserve Bank of New York.The first loss piece is mutualized across members to help prevent the kind of systemic risks that occurred during the downturn from recurring, says Tracy. This leads to a situation where lenders are monitoring the underwriting of their peers. Lenders still would have to rep and warrant their respective loans. This makes some demutualizing possible, he says.The Corker-Warner bill calls for the creation of a mortgage cooperative that would allow small lenders to sell their loans for cash.