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by Donald Marron and Phillip Swagel

We propose a specific reform of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that securitize and guarantee conforming mortgages.  Our plan protects taxpayers and the overall economy from the systemic risk posed by the former GSE model, while ensuring that financing remains available for housing even in periods of credit market strains.  Under this proposal the two firms would become private companies that buy conforming mortgages and bundle them into securities that are eligible for government backing. The reformed firms would not have the investment portfolios that were the main source of risk under their previous structure. The federal government would offer a guarantee on mortgage-backed securities composed of conforming loans. This guarantee would be explicit, backed by the full faith and credit of the United States. To compensate taxpayers for taking on housing risk, Fannie and Freddie would pay an actuarially fair fee to the government in return for the guarantee, and the shareholders of the firms would take losses before the government guarantee kicks in.