In the battle to formulate a new approach to guaranteeing housing credits, one big issue has been what role, if any, the big GSEs should play. The battle of the pundits has raged, but now the government is on the brink of refining its views and taking a firm position.

The Washington Post reports that the Obama Administration has set up a small team of advisors to develop a proposal that would likely continue the government's role in the mortgage market. The role of Fannie Mae and Freddie Mac, despite their checkered pasts, would continue, though the specific entities might not survive in their current form. This will be a disappointment to those who think that the government ought not to be involved in the market (the politics around this is messy and heated), but to the banking and mortgage industry this is good news.

The bottom line is there were many benefits to having the GSE securitized product the way they did. The financial benefits of the GSEs were obvious. The problems occurred when as an industry we got greedy and started securitizing stuff that had more risk than we ever imagined. All this said, the specifics have not been determined. It is possible that Fannie and Freddie could be privatized and heavily regulated. In any case, it seems that the insurance role of the government is not going away. My sense is that the administration needs to banish Fannie and Freddie at least in name. They are painful reminders of all that went wrong, and if they pitch this as something that extends their lives, they will have dealt themselves a setback right off the bat. They need to banish the past but keep the insurance role somehow. That won't be easy.

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- here's the article

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