Economists, politicians and financial pundits have spent plenty of time mulling the future of Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), questioning the duo’s future in the mortgage industry. Now the Federal Reserve is starting to fill in that blank, with specific guidelines released last month on what a government-backed mortgage lender might look like.
Here’s the deal: In mid-August, at the Conference on the Future of Housing Finance, the Federal Reserve of New York rolled out new ideas that could drastically reshape the governments’ role in the mortgage lending market.
The New York Fed’s report, “A Private Lender Cooperative Model for Residential Mortgage Finance,” written by analysts Toni Dechario, Patricia Mosser, Joseph Tracy , James Vickery and Joshua Wright, is described as a set of six design principles for the reorganization of the U.S. housing finance system and would apply them to one model for replacing Fannie Mae and Freddie Mac.
That “one model” is what the report calls a lender cooperative utility. The Fed analysts say, everything being equal, a “co-op” model is the best way to restructure Government Sponsored Enterprises like Fannie and Freddie:
“While each different model for a successor to the GSEs has its own strengths and weaknesses, a private lender cooperative utility may provide the best overall solution based on the design principles listed earlier.”
It’s no secret Fannie and Freddie are both on a fragile financial foundation. Both are in debt for up to $145 billion from government loans. And some estimate it might cost taxpayers up to $1 trillion to ultimately bail them out – money the U.S. Treasury can ill afford to pay in an era of high government debt. Curretly, Fannie and Freddie now account for about 75% of all U.S. mortgage loans.