Industry group proposes replacing Fannie, Freddie

WASHINGTON — A mortgage industry group wants Fannie Mae and Freddie Mac replaced with private companies that would be able to issue mortgage bonds formally backed by the federal government.

The Mortgage Bankers Association’s proposal, released Wednesday, offers a detailed plan for how to restructure the U.S. mortgage market, which has been torn apart by the housing bust.

The Obama administration doesn’t expect to announce its plans for the two companies until early next year. It has listed several options, including merging them into a federal agency, shutting them down, or have their bad mortgage assets split into a new government-backed company.

Fannie Mae and Freddie Mac own or guarantee about $5.4 trillion in mortgage debt and have needed about $96 billion in federal aid since they were seized by federal regulators last fall. The companies’ debt is not officially backed by the federal government, but has been effectively guaranteed since the takeover.

The mortgage bankers’ plan would replace Fannie and Freddie with several federally regulated private companies known as Mortgage Credit Guarantor Entities (nicknamed “McGees”). They would buy loans and sell them as bonds with their own guarantee attached, and would pay the government a fee for its backing.

For investor confidence to return to the market for mortgage-backed securities, “there has to be an explicit government backstop,” said John Courson, the trade group’s president.

Fannie and Freddie could be restructured into the new companies, but they would have to shed their bad mortgage assets first, possibly in the form of a government-owned “bad bank.” Major banks like Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., could also take up this role, provided they create separate subsidiaries to do so.

While Fannie and Freddie made massive bets on mortgages and associated derivatives, their replacements would only be able to have a minimal investment portfolio, according to the mortgage bankers’ plan.

Fannie and Freddie in the past had powerful lobbying operations, but are no longer allowed to lobby the government. That opens up the debate to more far-reaching reforms, and is an opportunity for Fannie and Freddie’s rivals to pick up business.

“It’s an opportunity to take a blank sheet of paper and create a system that will avoid some of the issues that we’ve had in the past years,” Courson said.

Jaret Seiberg, an analyst at Washington Research Group, said in a research note that the “odds are high for enactment” for the Mortgage Bankers Association’s proposal or something similar, partly because formal government backing for mortgage securities should keep mortgage rates low.