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5 Years Later, Mortgage Market Still Needs Fannie Mae, Freddie Mac (Update 1)

This, of course , has foiled the hopes of shareholders who held on to their stock through these years with the expectation that the agencies will be allowed to return to private hands much like other bailed out companies such as AIG (AIG). Former presidential candidate Ralph Nader is one among them.

The amendment came as a further blow to some hedge funds including Paulson & Co., Perry Capital and Akanthos Capital, who piled into the junior preferred shares of the agencies in 2010 when they were trading for pennies on the dollar on a bet that the shares would recover in value once the companies became profitable again and repaid the government.

Shareholders, including Perry Capital and Fairholme Capital's Bruce Berkowitz have challenged the legality of both the takeover and the amendment and remain optimistic.

"Fannie Mae and Freddie Mac have accomplished their mission. They did it. Mission Impossible accomplished," Berkowitz told CNBC on Wednesday. "It is time for them to be resuscitated, rehabilitated and to let equity build in these companies and prepare for the next rainy day.

Preferred shares of both the agencies have zoomed over the past year. But these investors have few sympathetic ears in Congress.

Right now there are two proposals on mortgage finance reform that have vastly different solutions, but they agree on one thing. Fannie and Freddie must die.

Fannie and Freddie by Any Other Name

A bipartisan bill introduced by Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.) calls for a wind-down of the GSEs, replacing them with private players who would purchase loans and issue mortgage-backed securities. Those securities could be backed by the government for a fee, but only in the event of a catastrophic loss.

So the government's guarantee will be both explicit and limited and will be paid for by mortgage borrowers rather than taxpayers.

The Protecting American Homeowners and Taxpayers (PATH) bill advanced by the House Financial Services Committee chairman Jeb Hensarling (R., Texas) is more extreme, calling for a fully private system to replace the GSEs with no government guarantees.

But under either proposal, mortgage rates are set to go up. Mark Zandi of Moody's analytics expects mortgage loan rates to climb 50 to 75 basis points for a borrower with an 80% loan-to-value ratio and a 750 credit score.

Goldman Sachs analysts believe that interest rates could climb as much as 100 basis points.

According to Vitaliy Liberman, a portfolio manager at Doubleline who invests in mortgage-backed securities, the prospect of rising interest rates will likely ensure there isn't any progress in GSE reform in the near term.

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