Thursday, January 8, 2009

Treasury Secretary Henry M. Paulson Jr. said Wednesday that allowing mortgage giants Fannie Mae and Freddie Mac to return to their old operating ways is not an option.

Congress and the next administration must decide the proper role government should play in supporting home ownership in light of the severe economic costs imposed on the nation from the bursting of the housing bubble, Mr. Paulson said.

The government in September took control of Fannie and Freddie, placing them in conservatorship. Mr. Paulson offered thoughts on a variety of possible solutions about what should follow that move, but did not endorse any.

One option would be to remove all direct and indirect government support and privatize the companies by breaking them up and selling them. But drawbacks to that approach included that it would likely offer a low rate of return to potential investors, Mr. Paulson said in a speech to the Economic Club of Washington.

“I am skeptical that a ‘break it up and privatize it’ option will prove to be a robust or even viable model of any substantial scale without some sort of government support or protection,” he said.

Mr. Paulson also raised the possibility of a public-utility type of company that would guarantee mortgage credit.

Under this plan, Congress would replace Fannie and Freddie with one or two private-sector entities that would purchase and securitize mortgages with a credit guarantee backed by the federal government.

The new companies would be privately owned but governed by a rate-setting commission that would establish a targeted rate of return, he said.

Such a proposal would be able to address the inherent conflicts between private ownership and public purpose that must be resolved to avoid the potential for another crisis in mortgage financing, Mr. Paulson said.

“With the knowledge of recent experience, we have a responsibility to begin work now on a long-term [government-sponsored enterprises] structure which avoids the dangerous mix of policy and market distortions created by the former flawed GSE mode,” he said.

Washington-based Fannie Mae and McLean-based Freddie Mac own or guarantee about half of the $10.6 trillion in U.S. outstanding home loan debt.

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