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On Fannie, Freddie Reform, Wall Street Is Left of Maxine Waters

Both the Corker-Warner bill, the bipartisan reform effort put forward by the Senate Banking Committee and the PATH bill, advanced by House Financial Services Committee Chairman Jeb Hensarling, call for a new mortgage finance system to replace the GSEs.

What's surprising is that these proposals to kill Fannie and Freddie, two agencies that helped subsidize homeownership for decades, have elicited little protest from the far left.

Even Congresswoman Maxine Waters (D.,Calif.), the House Financial Services Committee's top ranking Democrat, who was once an avid supporter of Fannie Mae and Freddie Mac, appears to have accepted a future without the agencies and is proposing an alternative model.

"Both sides of the aisle absolutely believe that we have got to do reform because of what happened with the subprime meltdown that we experienced in this country," she said at a recent housing policy forum organized by the Bipartisan Policy Center. "But I have to tell you, even if I wanted to say 'look how well Fannie and Freddie are doing, let's just leave them alone and let them keep going,' we are past that point now. We can't do that. Despite the fact that they are doing well, everyone remembers what happened. They remember the debt, they remember the meltdown, they remember the foreclosure and the fact that Fannie and Freddie undermined their own [underwriting] criteria when they were challenged."

Waters is expected to introduce a proposal that calls for a cooperative-owned securities issuer that would address the "perverse incentives created by Fannie Mae and Freddie Mac's ownership structure of private shareholders."

So what makes these big investors think the government will change its mind, given that even the most liberal policymakers are against the status quo?

Perhaps they believe that it is only a matter of time before policymakers are swayed by populist sentiment.

Winding down and replacing the GSEs with a brand new, untested housing finance model could be hugely disruptive to the mortgage market and could destabilize housing, they argue. Does the government really want to risk rocking the housing market, which has just begun to recover?

Even if the government was to continue offering a limited guarantee, analysts say the cost of mortgage credit may rise as much as 100 basis points as private capital would demand a higher return for their risk than the GSEs.

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