How to Close the Lid on the GSEs

In a move that surprised many, the Treasury Department and the Department of Housing and Urban Development came out with a joint report this week outlining the process for winding down the mortgage lending industry’s two largest investors, Fannie Mae and Freddie Mac. While many in the industry had been clamoring for an end to the GSEs, few thought the government would allow it to happen.

Of course, nothing in the new document indicates that it would happen quickly. In its report, the Treasury Department offered three options for shutting down Fannie and Freddie and reducing the government’s role in the lending business.

The first option is for the government to get out of lending completely, except for existing agencies, such as FHA and VA. The second is to provide a government guarantee on mortgages whenever the market is in trouble. The third option is for the government to provide a form of insurance for a select range of mortgage investments that are currently guaranteed by private insurers. The government guarantee would kick in only if those private companies couldn't pay.

Regardless of the option chosen, as long as it’s one of these, the government will still play an important role in the industry. But with the insurance option, it’s likely to cost the taxpayers a lot less.

There are other advantages to this option as well. Chief among these may be that it allows the private sector to begin to identify opportunities and provide long-term solutions to our industry. Who knows, it may even stop the governmental socio-economic experimentation that laid the foundation for the challenges the residential mortgage market has been saddled with...but I doubt it.

What’s your take on the best way to wind down the GSEs? I look forward to your comments.