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America's $11 trillion home-mortgage market is heading for a makeover.
The main focus is on the government-backed buyers of home loans: Fannie Mae, created in 1938, and its younger cousin, Freddie Mac, formed in 1970.
A series of policy options compiled from various sources by Andrew Davidson calls for turning Fannie and Freddie into cooperatives owned by the lenders that sell mortgages to them.
These cooperatives would package mortgages into securities for sale to investors. Unlike Fannie and Freddie, the cooperatives wouldn't own large amounts of loans and related securities on their books. To make the securities more attractive to investors, Treasury would receive fees for agreeing to cover any losses on the securities above a certain level.
This explicit backing from Treasury would replace the current system under which investors merely assumed that the government would stand behind Fannie and Freddie. Many investors, especially those overseas, have lost confidence in that "implied" guarantee and want something definite.
This approach would take away from Fannie and Freddie their traditional duties of ensuring liquidity in the market by buying mortgage securities when other investors back away and of making special efforts to finance housing for poor people. If Congress sees a need for such functions, Mr. Davidson says, it should set up government programs to achieve them and allocate funds for those purposes.