This thought came up while looking at Mortgage Bankers Association (MBA) CEO David Stevens’ proposal, unveiled at the MBA’s National Secondary Market Conference in New York, to combine Freddie Mac and Fannie Mae’s mortgage bonds into a single security.

This is a good idea, but why stop there? Do we really need two agencies to make a market in the conforming space? The question remains germane since nobody in the government or Congress seems to know what to do with the two previously hemorrhaging agencies that now are making operating profits. The current strategy (not doing anything) leads to the spectacle of the two slowly earning their way out of the tremendous losses they have cost the taxpayers over the next several years (or generations).

If the knife must come out, Freddie Mac would be the candidate for oblivion. Much younger than Fannie Mae, it was designed to serve the thrift market, back when thrifts were the dominant originations specialists. (Fannie Mae was designed to serve mortgage banks.)

The thrift industry, nicely profitable now after a severe winnowing during the thrift crises of the early and late 1980s, would not seem to need such assistance any more.

But perhaps a third mortgage agency is still needed. It could do more good serving the struggling nonconforming market and helping that sector become a viable channel of mortgage production again.

So, you would have Ginnie Mae, that profitable workhorse of the federal government, servicing the government niche (first-time borrowers, low-income borrowers, minority and immigrant borrowers), Fannie Mae servicing the conforming market and Freddie Mac (or a new entity) serving the nonconforming market (both jumbo and credit-impaired borrowers).

Should public policy dictate the government not support the entire mortgage spectrum, the third agency could be phased out once a strong, well-underwritten nonconforming niche was re-established to standards that mortgage investors would be comfortable with.

Before doing away with any of them, let’s take a moment to acknowledge all the mortgage GSEs doing a great job of keeping the conforming and government sectors open for business. The Federal Housing Administration (FHA) and Ginnie Mae in particular have done an excellent job that to date has not cost the taxpayers a penny of loss. The FHA’s expansion from single-digit market share to 30% or so in a couple of years (without exploding!) is a singular achievement worth remembering.

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