The main focus of Treasury Secretary Paulson's speech to the Economic Club of Washington was what to do with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). He suggested three possible scenarios for the two troubled companies. First, it should be noted that Feddie and Fannie were taken over by the government under a legal process called conservatorship and that together both companies guarantee nearly half of residential mortgages outstanding.
The Secretary said that both companies have a dual role to serve the public interest and to provide a rate of return to shareholders. To satisfy both of these ends he suggested that one or two new companies could be set up that would guarantee a set return to shareholders but would function differently than they do at present. The companies could purchase and bundle mortgages with a federal guarantee but would not hold a large number of mortgages.
A second alternative would be to nationalize Freddie and Fannie and perhaps place them under the umbrella of the Federal Housing Administration (FHA) which already insures mortgages against defaults. This would eliminate the private sector's role in evaluating mortgage risk.
A third alternative would be to cut Fannie and Freddie loose from their links to the government and turn them into purely private entities.
Freddie and Fannie are expected to extend a moratorium on foreclosure sales and evictions for some borrowers.
What are your thoughts on these proposals?
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