Paulson Suggests GSEs Adopt Utility Model

Speaking before the Economic Club of Washington, Treasury Secretary Henry Paulson outlined several possibilities for how government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac may be transformed.

Of the four suggestions offered by Paulson – nationalizing the GSEs by eliminating their shareholders, changing the GSEs into a Ginnie Mae-like entity that provides partial guarantees for mortgage-backed securities, privatizing the GSEs and replacing Fannie and Freddie with private-sector entities governed by a rate-setting commission – he seemed to most heavily favor the latter option.

Under what Paulson calls a "utility model," the privately owned entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios. A rate-setting commission would establish a targeted rate of return for the entities, as well as approve mortgage product and underwriting innovations.

"In this model, continued safety and soundness regulation would be essential," he said. Paulson made it clear that the current economic crisis provides opportunity for revamping the GSEs, saying it'd be a "grave error if we don't use this period to decide what role government in general, and these entities in particular, should play in the housing market."

Paulson also indicated that the GSEs need not return to their original, private/public form.

"Government support needs to be either explicit or non-existent, and structured, to resolve the conflict between public and private purposes," he argued. "Any middle ground is a recipe for another crisis."

His comments can be viewed in their entirety on the Treasury's Web site, http://www.treas.gov/press/releases/hp1345.htm.

SOURCE: U.S. Treasury

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