Fannie / Freddie Reform

The Congressional Budget Office ("CBO") recently released a report entitled, "Transitioning to Alternative Structures for Housing Finance", in which the CBO set forth its alternatives to the existing structures for Fannie Mae and Freddie Mac.  The report is summarized in Publication 49765.

The CBO came up with four alternatives to replace the existing GSEs.  The first alternative is to combine Fannie and Freddie into one federal agency and the CBO predicts that the combined agency would have a smaller market share than the existing two GSEs.  The second alternative is a hybrid entity in which private investors would participate with the federal government and share credit losses.  The third alternative would be structured such that the government becomes the insurer or guarantor of last resort and private investors would guaranty most new mortgages, except during times of financial crisis during which the government would guaranty most mortgages. The fourth alternative is for private investors to step forward to guaranty / insure all new mortgages and allow Fannie and Freddie to essentially wind down their business and not issue new mortgage guarantees.

The CBO report predicts that the roles of Fannie and Freddie will diminish over the next decade under current policies.  The CBO stated that policymakers could further reduce the roles of Fannie and Freddie by, (1) raising the guaranty fees charged by the GSEs, (2) changing the loan limits as the current average loan amount guaranteed is about $200,000, (3) sharing the credit risk with private investors in exchange for compensation of some nature, and / or (4) auctioning off a limited number of guarantees to be issued by the GSEs rather than requiring the GSEs to guaranty all eligible mortgages.

The report arrived at three conclusions.  First, that transitioning to a structure that emphasizes private capital will, while reducing the risk and cost to taxpayers, limit new mortgage loans and make them more expensive.  While there will be fewer borrowers, they will probably not face a significant increase in interest rates (which seems to contradict the first conclusion).  Thirdly, the GSEs will cost the government less over the next decade because their fees now are close to what private insurers would charge.

I have not seen anything to indicate that this report is backed by any significant group or by politicians of either party.  The fate of the GSEs is still anyone's guess and the report does not appear to do much to further any plans to privatize the GSEs.  What do you think should be done with Fannie and Freddie?