When Judge Royce Lamberth sent Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders a major setback last week, many of them responded by pointing out the other legal options still available (appeals, and a host of other cases that don’t rely on the Administrative Procedures Act). But they also returned to one of the core arguments for investing in Fannie Mae and Freddie Mac in the first place: the GSEs are essential to maintaining the type of housing market that Americans are used to with affordable 30-year mortgages.

“My solution: recognize what the GSEs are now – mortgage utilities – define the scope of their future operations as such, and move on to a new mortgage-finance system in which government sponsorship is explicit, but limited,” writes Federal Financial Analytics, Inc co-founder and managing partner Karen Shaw Petrou.

Petrou doesn’t see an alternative to Fannie Mae and Freddie Mac

Petrou takes it for granted that the GSEs have been de facto nationalized at this point and that attempts to end the conservatorship are ill-fated, though that doesn’t mean shareholders won’t get some sort of compensation. The real issue for her is that there doesn’t seem to be any other plausible replacement for the GSEs.

She isn’t enthusiastic about either Representative Jeb Hensarling’s free market purist approach (abandon the GSEs, encourage private label MBS) or Crapo-Johnson’s proposal to create a new federal agency to manage the secondary mortgage market, but she doesn’t think either of them has a chance of passing into law anyways. The Treasury has a plan to standardize private label MBS so that they can trade more easily and transparently in the OTC market, but without a government guarantee (implicit or explicit) it’s hard to see how this would matter. It’s telling that private label MBS have all but disappeared since the financial crisis, while Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and Ginnie Mae issuances continue to be oversubscribed.

Common securitization platform is a first step

“FHFA has a lot of authority to redesign the GSEs – indeed, it’s doing so with the common securitization platform,” writes Petro. “Now, it must also try its hand at creating a mortgage guarantee utility.”

According to Petrou, acknowledging that the GSEs have actually been nationalized would allow the Treasury and the FHFA to end the ‘life-support’ model that is keeping the GSEs in such a precarious state. FHFA chief Mel Watt is already planning for the future; clarifying what exactly he’s supposed to achieve would go a long way to ending the uncertainty surrounding the secondary mortgage market.

Fannie Mae Should Be Recognized As A Mortgage Utility: Federal Financial Analytics
Source: Wikimedia Commons