A major financial industry trade group got Washington's attention last week when it called for the total elimination of Fannie Mae and Freddie Mac -- the giant, money-losing home loan companies now under federal control.

The Mortgage Bankers Association doesn't want an end to government support for the home mortgage system, however. It wants smaller, more numerous competing organizations, none allowed to ever get "too big to fail," as replacements for the current system dominated by Fannie and Freddie.

At least one of the replacement companies could take the form of a cooperative, owned solely by participating banks and mortgage lenders, who'd share the risks and rewards.

Underpinning the entire new approach would be federal government backing -- much like what's now provided by Ginnie Mae on FHA and VA loans -- that would guarantee investors in mortgage securities the timely payment of principal and interest.

Though the Obama administration had no immediate response to the proposal, Congress is working on a restructuring of the two companies, and has already held one hearing.

The mortgage bankers suggested that during the transition period to a new system, the government consider creating a "good bank/bad bank” approach that would concentrate Fannie's and Freddie's nonperforming and delinquent assets in one company -- the "bad” bank for resolution, workouts and sales -- while the profitable assets would go to the "good” bank.

The same idea already has gotten attention inside the Treasury department, which will have the primary responsibility for drafting the White House's blueprint for the companies.

But you might ask: What does the debate over what to do with Fannie and Freddie mean to future home buyers and real estate professionals? Potentially a lot. Why?

Because if the replacement system is targeted primarily at providing government guarantees for plain-vanilla, moderate-sized fixed-rate home loans, it could penalize other parts of the mortgage market that are underserved - and too costly - right now.

The best example is the jumbo market. If none of the new, replacement companies specializes in serving that segment, buyers will continue to pay needlessly higher interest rates for home mortgages that are no more risky than smaller loans.

The National Association of Realtors wants consideration not only of financing for jumbos but even certain types of commercial real estate somewhere in the ultimate Fannie Mae-Freddie Mac solution.

Where's this all headed? Congress is likely to develop legislation sometime this Fall, and the Obama administration is certain to weigh in as well. So look for business as usual at Fannie and Freddie for the time being … but then look for big changes beginning next year.

Published: September 7, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.