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Economist examines Fannie, Freddie

The future remains uncertain for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), but the two government-sponsored enterprises look to be a stabilizing force in the residential real estate market, an economist said Tuesday.

Investors are turning to GSE securitization these days, with Fannie and Freddie comprising nearly 80 percent of total mortgage backed securities issued, LaVaughn Henry told an audience of industry professionals at the Burnham-Moores Center’s Ninth Annual Residential Real Estate Conference at the University of San Diego.

The director of U.S. economic analysis for the PMI Group (NYSE: PMI) hesitated to use the proverbial phrase “flight to quality,” but acknowledged it was a “flight to something.”

Privately issued mortgage-backed securities (MBS) have all but disappeared after comprising 50 percent to 60 percent of all MBS issued in 2005 and 2006, according to one of Henry’s graphs.

He observed that Fannie and Freddie actually may have helped mitigate the mortgage crisis in some areas — even their shady risk assessment was healthier than those made in the private sector.

States stung most severely by the mortgage crisis — California and Florida — had low GSE activity because loan limits in those regions were so high, Henry said.

Furthermore, the secondary mortgage market under Fannie and Freddie is responsible for much of the growth in the real estate market, he said.

“I’m not here to be a cheerleader,” Henry said, “but (Fannie and Freddie) are a reason we are where we are today in terms of lending.”

Still, the mortgage crisis revealed the need for change.

“The (public-private) hybrid outlived its usefulness,” agreed Mark Riedy, executive director of the USD Burnham-Moores Center for Real Estate.

Both Fannie and Freddie are likely to remain in federal conservatorship while the housing market stabilizes, awaiting the political battle that will decide their fate.

Henry outlined five different proposals in his talk:

*The GSEs return to the private sector and once again take up their public mission, but under stronger regulation.

*The GSEs become similar to a public utility, with regulated activity and return.

*The GSEs take on a structure akin to that of the Federal Home Loan Banks, with regional locations and customers.

*The GSEs become completely privatized.

*The GSEs become completely nationalized.

Riedy, who was president of Fannie Mae in the 1980s, said he would favor privatization if he thought it were feasible, allowing Fannie and Freddie to avoid being caught between public and private interests.

However, Fannie and Freddie are simply too big and control too much of the mortgage market for privatization to work, Riedy said.

Riedy and other economists at the conference agreed that privatization and nationalization appear extreme, but note that it will be federal officials, rather than economists, who decide which scenario is ideal.

The U.S. government has expanded rapidly on its intervention in the mortgage market this year, starting with the Housing and Economic Recovery Act in July and announcing most recently the Federal Reserve’s decision to purchase GSE debt and mortgage-backed securities.

The latter would have the most immediate effect, Henry said, eliminating some of the uncertainty and so-called “toxicity” of the assets.

The other November announcements of a loan modification program and a moratorium on foreclosures until Jan. 9 may prove beneficial later if enough people are helped and the foreclosure freeze lasts long enough, Henry said.

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