The National Association of Realtors® (NAR) suggested Tuesday that there be a sweeping reorganization of the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.  The proposed changes would create two non-profit government-chartered secondary mortgage market authorities which, NAR said "should ensure that the flow of capital continues to enter the mortgage market regardless of the state of the housing or mortgage markets or overall economy."

The new entities would not be government agencies per se.  They would be self-sustaining, require no annual appropriations from Congress and would be politically independent but with strong oversight by the Federal Housing Finance Agency (FHFA). The business model, however, would require that the "government must clearly and explicitly guarantee the business of this entity."

The risk to taxpayers would be mitigated by a requirement of mortgage insurance on any loan with an 80 percent loan to value ratio or higher and by higher mortgage backed security (MBS) guarantee fees.  Only if these insurance pools are insufficient to meet a future crisis would the government have to provide financial backup.  

The NAR said it believes that "any organization with a private profit and public loss structure as the GSEs are presently structured is inherently flawed." However, it feels that the two GSEs are best positioned to smoothly transition into such authorities because of their existing infrastructure.  The new authorities, the Association said, should take the best components of Fannie and Freddie and import improvements from other secondary market models. 

A pilot program to increase the use of covered bonds, particularly in commercial real estate should be conducted in the multifamily housing area with an eye toward exploring their ability to provide additional capital for residential lending.  NAR suggests that the FDIC might be used to guarantee the covered bond option to encourage private market participation.

Unfortunately, the GSE reform process is not expected to make much progress in 2010.

Today, speaking before the House Budget Committee, Treasury Secretary Tim Geithner said the Treasury will lay out broad principles for Fannie and Freddie later this year while legislative proposals would come next year. 

Geithner also informed us that he did not believe it was necessary to consolidate the obligations of Fannie Mae and Freddie Mac onto the federal budget.

"We do not think it is necessary to consolidate the full obligations of Fannie and Freddie onto the nation's budget but we do think it's very important ... that we make it clear to investors around the world that we will make sure that we will take the actions necessary" to ensure their stability"

MND expects a slow and steady three step GSE rebuilding process. READ MORE