The US Housing Finance Industry is similar to a stool with 3 legs. One of those legs is the “government”-sector leg existing primarily through FHA and Ginnie Mae; the second leg is the “private”-sector leg and functions through large diversified financial institutions such as Bank of America, Citi, Chase, and Wells Fargo; and the third leg of that stool is the “quasi-qovernmental”-sector and functions through Fannie Mae and Freddie Mac.

The recasting of Housing Finance Industry must take on three steps and these are reform, reorganize and reassure. Let us understand each step better.

Reform: requires that action be taken to reform FHA and Ginnie Mae.

At their core, both organizations are insurance companies - FHA to the extent that it insures lenders against the credit risk associated with defaults by FHA borrowers - and Ginnie Mae to the extent that it guarantees the timely payment of principal and interest to investors in Ginnie Mae securities and thereby insures those investors against the default risk posed by the issuers of those securities.  These roles must be distinguished from the larger housing policy/program role that is today a key component of the U.S. Department of Housing and Urban Development (HUD).

Reorganize: Fannie Mae and Freddie Mac and merge them into a single organization that combines the best of each organization. So to answer my earlier question, unequivocally YES there is an important role for the GSEs in the US housing finance industry of the future - just not in their current form.

While there were once good and valid to have two such entities, those conditions no longer exist.  Unquestionably, both organizations are populated with very bright, dedicated and hard-working professionals, and each in their own way contributes materially to the essential processes of managing credit risk and providing liquidity to the secondary market.

Naturally, other good models will be proposed and deserve serious debate and consideration.  And regardless of which emerges as the preferred model, reorganization of the current entities is critical first step.

Reassure: the community of investors world-wide that the US housing finance industry has been reset on a solid foundation. This is accomplished only when all three legs of the stool are rebuilt and reset – because only then will the requisite level of investor confidence - and in turn private capital – return to the industry as a replacement for the trillions of dollars that are today coming from the US Treasury.

Absent such reassurance, a recast US Housing Finance Industry will remain a wish and its renewed vitality will be long delayed.