With the likelihood of legislation to create a new housing finance system increasingly remote, the government should still take interim steps to transition away from a system built around Fannie Mae and Freddie Mac, industry representatives said Wednesday.

At a Senate subcommittee hearing, Sen. Jack Reed, D-R.I., suggested that after decades when there was bipartisan agreement that the government should support homeownership, old assumptions are now being reconsidered.

"How do we make a transition? And how do we do it in an effective way?" Reed asked.

One idea, suggested by Andrew Davidson, whose New York-based firm provides research to investors in the mortgage market, would be to encourage or require Fannie and Freddie to attract private capital.

More specifically, he said, both GSEs could develop a subordinated bond structure, whereby private investors would take the first-loss position on the two GSEs' bonds, either side-by-side with Fannie Mae and Freddie Mac, or in some cases ahead of them.

Davidson noted that such an approach would probably require the approval of the Federal Housing Finance Agency (FHFA), which regulates the two agencies. The FHFA has played an active role in decision-making at the two firms since the federal government became their conservator in 2008.

"I think the key factor there is sending the message to FHFA that experimentation is good," Davidson said, "and you don't need to have sort of a sole focus on conservatorship of every dollar today, and that finding the right solution actually adds value to the GSEs over time."

Thomas Hamilton, managing director at Barclays Capital, said that he would like to see a number of steps taken over the next 18 months.

On his list is lowering the size of mortgages that Fannie Mae and Freddie Mac can guaranty — a decrease in the loan limit is scheduled to take effect on Oct. 1, but Hamilton indicated that he would like to see it fall further over the next year and a half.

Hamilton, who was testifying on behalf of the Securities Industry and Financial Markets Association, also suggested that the government could limit the amount of borrowing that banks can do from the Federal Home Loan Banks.

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