) -- A financial lobbying group has proposed to break up
into smaller firms across the country after nearly a year of silence from the industry and regulators about how the mortgage finance giants should operate in the future.
The firms would remain public-private hybrids in a plan released Wednesday by the Mortgage Bankers Association.
Fannie and Freddie have faced criticism for years for their size and government backing, with detractors saying they reaped unfair advantages for implied guarantees on debt issuance while booking huge profits because other firms simply couldn't compete on the same scale.
The companies also served a dual role: tasked by Congress with expanding homeownership to minorities and less wealthy Americans, but also tasked with mitigating risk for shareholders. Ultimately, their increasing exposure to subprime debt helped seal their fate, pushing the two firms into conservatorship nearly a year ago.
The MBA's report says the size and scope of the U.S. housing market "warrants a federal government role" for liquidity and stability. However, the new plan would have the government provide an explicit guarantee on the risk of Fannie and Freddie securities. The firms would pay premiums into a federal insurance fund that would be used in case of default.
The guarantees would cover the credit risk and liquidity of each security, rather than interest-rate risk, implying higher coverage and premium prices. Interest-rate risk would be held by the security's investor.
The plan proposes that Fannie and Freddie would initially remain as two or three entities, called mortgage credit-guarantor entities, or MCGEs. They are now referred to as government-sponsored entities, or GSEs.
The ultimate number of firms would be decided by regulators, factoring in competition, effective oversight, efficiency, the time it would take to transition from the current framework, and the notion that none of the firms should be considered "too big to fail."
While the Obama administration has worked feverishly to come up with a regulatory overhaul for banks, there has been precious little information disclosed about the future of the GSEs. An idea to place Fannie and Freddie's assets into a bad-bank structure was floated last month but quickly dropped because it seemed to lack political support.
"It's now been more than two years since the secondary mortgage market collapsed," Michael D. Berman, a MBA vice chairman said in a statement.
Regulators seized the two firms on Sept. 7, 2008. They are now 80%-owned by the government, which has injected nearly $100 billion worth of federal capital into the firms to date, with another $100 billion credit line if necessary.
The plan released by the MBA, and crafted by senior executives at
Bank of America
, and an assortment of other banks, may face political pressure itself. While the industry has become more risk averse and is profit-driven, legislators like Barney Frank (D., Mass.) are loathe to weaken the goal of expanded homeownership, the quintessential American dream.
"Our Council, featuring some of the best minds in our industry, has spent significant time looking at the secondary market -- what worked and what didn't -- and came up with these recommendations," John Courson, MBA's president and CEO, said in a statement. "While this is not the only viable framework, we believe the recommendations represent a workable approach, balancing the government's ability to ensure liquidity, with the need to protect taxpayers from the credit and interest rate risk inherent in mortgage finance."
-- Written by Lauren Tara LaCapra in New York.