Prospects for Federal National Mortgage Association, Henry Paulson

On Wednesday this week outgoing Treasury Secretary Henry Paulson was speaking about four possible options for Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. He discussed such approaches as nationalization, privatization and two hybrid options. In addition he also said he didn't think Congress should use more of a $700 billion bank bailout fund to provide additional cash infusions to the automotive sector.

Earlier in September both Fannie were placed by the Treasury in a conservatorship. Paulson noted that this should be a temporary condition as long as he thinks that nationalization is a "less than optimal" approach. Discussing privatizing strategy Paulson said that he was skeptical of fully privatizing the housing entities. And with the strategy he offers Fannie Mae and Freddie Mac would be broken up into a number of entities which would "minimize risk."

First hybrid strategy offered by Paulson is to create an entity like Government National Mortgage Association for non-Federal Housing Authority mortgages. This structure he said would provide only a partial guarantee for mortgage backed securities. And most supported approach was to establish a mortgage credit guarantor. Following this strategy Congress would replace Fannie Mae and Freddie Mac with private entities that would purchase and securitize mortgages guaranteed by the federal government. These entities would be regulated by a rate setting commission that would also approve mortgage products.

After discussing mortgage issues Paulson said that Congress needn’t use more of TARP funds to help automakers. On December 19 the Treasury allocated $13.4 billion of TARP in cash infusions to General Motors Corp. and Chrysler, which is owned by buyout shop Cerberus Capital Management. He said that while the TARP was intended to deal with financial instability automakers should search for other sources of additional financing.

Source: MarketWatch