Paulson Says Fannie, Freddie Need to Change

Paulson says changes needed at Fannie, Freddie By Martin Crutsinger

WASHINGTON -- Treasury Secretary Henry Paulson said Wednesday that allowing mortgage giants Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) to return to their old operating ways is not an option.

Congress and the next administration must decide the proper role government should play in supporting home ownership in light of the severe economic costs imposed on the nation from the bursting of the housing bubble, Paulson said.

The government in September took control of Fannie and Freddie, placing them in conservatorship. Paulson offered thoughts on a variety of possible solutions on what should follow that move, but did not endorse any.

One option would be to remove all direct and indirect government support and privatize the companies by breaking them up and selling them. But drawbacks to that approach included that it would likely offer a low rate of return to potential investors, Paulson said in a speech to the Economic Club of Washington.

"I am skeptical that a 'break it up and privatize it' option will prove to be a robust or even viable model of any substantial scale without some sort of government support or protection," he said.

Paulson also raised the possibility of creating a public-utility type of company that would guarantee mortgage credit.

Under this plan, Congress would replace Fannie and Freddie with one or two private sector entities that would purchase and securitize mortgages with a credit guarantee backed by the federal government. The new companies would be privately owned but governed by a rate-setting commission that would establish a targeted rate of return, he said.

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