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9 Ideas for Fannie and Freddie's Future


Let the debates over how to fix Fannie Mae and Freddie Mac begin.

Freddie and Fannie

Congress is expected to debate the future of government-sponsored enterprises (GSEs) and the future of US housing finance in January.

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The Obama administration is supposedly planning to unveil a plan for the overhauled system by the end of this month and once the proposal is in play politicians are likely going to take a whack at it. Analysts have suggested the debate over the two entities could last months. Barclays (BCS) analysts have estimated that it could take up to 20 years for changes to take effect, once a plan is set in place in order to prevent a shock to the economy.

In addition, the issue of mortgage put backs is sure to draw a lot of debate in the banking industry, especially now that Bank of America (BAC) has agreed to pay back $2.6 billion in put backs. Several other banks such as JPMorgan Chase (JPM) could be on the line to buy back as much as $120 billion of troubled mortgage-backed securities.

Politicians are not alone in expressing varying opinions over the future of the GSEs. Several well known investors, as wells as banking, private equity and hedge fund executives have also expressed their views.

Below are some personalities that TheStreet thinks offer, or could offer some interesting insight on the future of Fannie and Freddie.

Wilbur Ross

WL Ross& Co's Wilbur Ross has not been shy about expressing what he thinks the government should do with Fannie Mae and Freddie Mac. Ross believes that eventually the mortgage market needs to be privatized. He has suggested that the government may want to create one entity or eliminate them all together. The trick is to eliminate the subprime lenders while also appropriating money for low-income mortgages through the normal budget process.

Ross told an audience of insurance professionals at a conference in New York last year that the government must, "absorb the hundreds of billions of dollars of embedded losses because our government would lose its credibility if Fannie Mae and Freddie Mac defaulted."

Ron Paul

Representative Ron Paul, who has cried out to end the Federal Reserve in his book End the Fed has in the past called for the abolishment of Fannie Mae and Freddie Mac.

The irony is that Paul was one of the first politicians to call the housing bubble. In 2002 Paul predicted that the housing market would likely crash due to subprime mortgage risks the GSEs were taking on. He also had proposed the Free Housing Market Enhancement Act, which would have repealed special privileges for housing-related government-sponsored enterprises and was a driving force in believing that a housing bubble would be the eventual result.

"Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions," he said in a speech to the House of US Representatives in 2002.

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