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The New York Times is reporting that the government is seriously contemplating a broad-based refinancing of mortgages guaranteed by the two GSEs , Fannie Mae and Freddie Mac, in an effort to reduce payments by those borrowers who currently cannot refinance either due to negative equity in their homes or due to their own credit constraints. This idea was originally raised in 2008 as the housing crisis got underway and has been viewed by its proponents as a way for the government to provide a stimulus...

If the market ever expects housing to contribute 25% to 30% of GDP again, it will require congress to completely overhaul the housing finance system, deleverage those institutions that have enjoyed the “too big to fail” status and let the private markets control housing rather than the socialized housing system currently in place....

While many expected the disturbingly high number of GSE directed repurchase demands to mortgage lenders on nonperforming loans to crescendo in 2009 – 2010 is looking to be an even more onerous year for mortgage lenders that sold loans to the GSEs. Nonbank financial institutions in particular, could be at significant financial risk by the contingent liabilities associated with the representations and warranties made to the GSEs for the quality, eligibility, and integrity of loans they originated and sold; and, which are now seriously delinquent or in default...

Unless we agree that our housing finance structure of the future is a “national” function – run in large measure by the federal government and funded by taxpayers --- we are long overdue to begin in earnest the debate over the real future of this industry. The first, honest question of that discussion should be: Is there any role for left the GSEs? ...

The US Treasury could allocate a fraction of what is being "committed" to the solvency of the GSEs to initiatives directly designed to assist distressed markets and homeowners. Sustainable foreclosure prevention programs like the “new and improved” FHA Hope for Homeowners program, which forgives principal but allows the government to share in future appreciation of the home’s value, could be widespread with Treasury funding for principal reductions. Some of the unspent Treasury dollars could be used to allow the GSEs to sell some of their riskiest or best assets (depending on risk management philosophy) and take the losses. I feel the current approach of using Treasury funding to increase GSE portfolios, allowing them to take on more risk, and delay dealing with the problem is far more dangerous and costly in the long run. ...

What’s not clear from yesterday' announcement is whether or not Fannie and Freddie are acting strategically or at the behest of Treasury or FHFA. Strategically this makes a lot of sense since the GSE’s have long supported a diverse market of loan sellers: credit unions, community banks, no profits, etc. - to avoid the operational risks and margin compression that come from fewer, larger clients....

Outgoing Treasury Secretary Paulson has suggested that Congress should replace Fannie Mae and Freddie Mac with one or two private-sector entities. Those entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios....