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Fannie And Freddie: The Old Ways Can't Go Forward

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CNBC.com

I’ve got to give it to Treasury Secretary Henry Paulson; he’s not going out without fightin’ words over Fannie and Freddie .

Yes, this is the guy who took over the two mega mortgage giants and effectively nationalized the nation’s housing market. He did that, in his words, “avert the financial market meltdown that would ensue from the collapse of these institutions.”

Now granted, financial markets pretty much melted down anyway after the fall of Lehman, but I’ll give it to him that it could have been worse. The move lowered interest rates on the 30-year fixed for a few weeks, but the numbers went right back up as the rest of the credit markets tried to find footing. Only after the Fed announced that it would buy billions of dollars worth of GSE securities did mortgage rates really fall meaningfully.

So today Secretary Paulson used his now very temporary podium to offer advice to the new Congress and the Administration on the future of the GSE’s. In the short term he said:

"To the extent that the Congress and the next Administration wish to use the GSEs as a tool to further reduce mortgage rates, they could, under existing authorities, make large purchases of mortgages made at a target rate of, say, 4 percent – although very large volumes of Treasury issuances would be required for such a program to be effective."

Okay, so knock interest rates down to 4 percent. Frankly I don’t think that’s going to work. Interest rates are already approaching 4.75 percent for many qualified borrowers, and while it has sparked a refi boom, it hasn’t exactly sparked a home purchase boom, which is what the housing market needs for recovery. I spoke to the new president of the National Association of Realtors this morning, Charles McMillan, and even he agreed: “We’ve won the interest rate discussion. Interest rates are as low as they’ve been in fifty years, but buyers aren’t buying.”

Stemming foreclosures, or at least facilitating short sales, are going to be some of the best short-term solutions to putting a floor in home prices, which is what the market needs. The GSE’s are getting more aggressive in that arena, but we’ve yet to see the cold hard results.

As for the long term, Paulson advocates the GSE’s not be nationalized or privatized but metamorphosized into a public utility type model. The two would be replaced with private sector entities that would have their credit guarantee backed by the government.

They would not have investment portfolios. They would be privately owned but governed by a rate-setting commission that would establish a targeted rate of return, “thereby addressing the inherent conflicts between private ownership and public purpose.”

Clearly Paulson doesn’t think the GSE’s should be left to their own devices again, and I have to say I agree.

In their current state they are too large and too ambiguous in their mission to operate effectively. Once all the dust settles and the housing market returns to health, as it inevitably will, the old model simply cannot persist. As the old saying goes: Fool me once.

Questions? Comments? RealtyCheck@cnbc.com