As the federal government continues its mission to assess the damage of the Great Recession and make changes to prevent an encore performance, everyone’s looking at Fannie Mae and Freddie Mac — collectively referred to as “Frannie”. The efficacy of the government mortgage giants is being scrutinized in the fallout of the Great Recession. Economists and homeowners alike are grabbing their torches and pitchforks, ready to disassemble Frannie and move forward with a privately financed system of mortgage lending.

But can we survive without them?

The private lending industry — the mortgage-backed bond (MBB) market — has expressed unwillingness to make any loans without a government guarantee. Proposals are streaming in from financial experts who believe lenders and homeowners must be slowly weaned off their dependence on Frannie. One suggests the entities raise the fee for their guarantee to the bond market — currently one-fifth of a percentage point — every six months by five points. This process would allow the market to set rates on its own, while giving lenders time to adjust.

Another proposal suggests Frannie lower the maximum amount of mortgage that can be guaranteed by an annual 20%. Even more conservative is the proposition that private mortgage insurance companies (PMIs) are created to compete to guarantee mortgages for investors, while keeping a federal guarantee to back them up as a last resort.

One thing is clear on all sides: change is imminent.

first tuesday take: The government, in the form of “Frannie”, must continue filling the role as the lender of last result until home prices in California (and in the nation) stabilize for at least a two-year period and insolvent homeownership (foreclosures) simmers down. If recovery is to abound, lenders must be forced to do their part and acknowledge their losses by approving principal reductions.

Wall Street has demonstrated its ability to supply all the mortgage money homebuyers need to complete transactions. The dissolution of Frannie at the appropriate time will allow them to float MBBs way beyond the limits of government guarantees, which is exactly what they want. [For more information regarding the dissolution of Fannie Mae and Freddie Mac, see the August 2010 first tuesday article, Freddie and Fannie need more help, before disappearing.]

Re: “For housing, a quick fix or less risk” from the NY Times