The best option for Fannie Mae and Freddie Mac may be to convert them into public, utility-like organizations that would not hold any investment portfolio, U.S. Treasury Secretary Henry Paulson said on Wednesday.

Speaking at the Economic Club of Washington, Paulson said returning Fannie Mae and Freddie Mac to their pre-conservatorship states remains inadvisable even though a permanent nationalization would also be detrimental as it crowds out the private sector.

"A public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain," he said.

He also said the U.S. government's credit support of nearly all new mortgages is unsustainable in the long run and that policy-makers will have to decide on an appropriate level of government housing subsidies. He noted that Fed purchases of Government Sponsored Enterprise debt and mortgage-backed securities, along with reducing rates, may help attract new homebuyers.

Paulson also said support for GSEs must be explicit or non-existent and that a middle ground is a recipe for crisis.

By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2009