Last year's Dodd-Frank law forced regulation overhaul for the two mortgage giants whose failure has cost taxpayers 134 billion since the government took them over in 2008. Change has been legally mandated but where to go next seems to be a decision with no clear consensus.
The Obama administration report recommending changes to be made is expected in mid-February. The delay has been caused in part by staff turnover but also because of policy disagreement between the factions involved in the overhaul. The lack of consensus means the final report is likely to recommend two or three proposals with discussion of the merits and drawbacks of each rather than a single mandate for change.
The questions to be answered are important. Should the government be involved in backing mortgage-backed securities at all or should the free market prevail? Can the mortgage markets survive without government guarantee?
If the government guarantee route prevails, the next question is about explicit rather than implicit guarantee. The existing model was one of implicit guarantee with investors assuming the government would bail out Freddie and Fannie in times of trouble - as it indeed did. Under one new proposed model, bank-owned cooperatives or companies would operate like regulated utility companies and would issue securities explicitly guaranteed by the US government. But the government would need to be able to collect enough fees from mortgage originators to cover the cost of the guarantees. Without that ability, we would be returning to the same conditions that led to Fannie and Freddie's collapse.
As a minimum step forward, the Treasury is likely to begin encouraging private capital to return to the market by allowing Freddie and Fannie to raise fees they charge to lenders and increasing the number of available mortgages the private companies can purchase.
Any steps that limit the availability of mortgages to home buyers or raise their costs could hurt the fragile housing markets further. On the other hand, a return to business as usual is not an option.
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