Five policy heavy-hitters issued a proposal this week to merge Fannie Mae and Freddie Mac into a single government corporation as a way to move beyond the conservatorships of the two government-sponsored enterprises.

Under the plan, titled "A Promising Road to GSE Reform," the new corporation — called the National Mortgage Reinsurance Corp. — would build on steps the Federal Housing Finance Agency has already taken to reform the two GSEs. Its primary function would be to continue risk-sharing initiatives with private investors and mortgage insurers.

"Rather than winding down the current system and starting largely from scratch, we merely accelerate the steps that FHFA already has underway to transfer the GSEs' risk to the private market and synchronize their activities, and then use their merged infrastructure to form the structure for the government corporation that replaces them," the report said. The proposal was written by Urban Institute senior fellow Jim Parrott; the mortgage securitization pioneer Lewis Ranieri; Gene Sperling, a former director of the National Economic Council; the economist Mark Zandi; and Barry Zigas of the Consumer Federation of America.

According to the proposal, the NMRC would acquire conforming loans from originators or loan aggregators, and issue securities through a platform managed by the corporation. The corporation would also guarantee the timely payment of principal and interest, and ensure credit access for underserved communities through affordable-housing initiatives, among other functions.

"The NMRC would differ from Fannie and Freddie, however, in several important respects," the report said. "It would be required to transfer all noncatastrophic credit risk on the securities that it issues to a broad range of private entities. Its mortgage-backed securities would be backed by the full faith and credit of the U.S. government, for which it would charge an explicit guarantee fee, or g-fee, sufficient to cover any risk that the government takes. And while the NMRC would maintain a modest portfolio with which to manage distressed loans and aggregate single- and multifamily loans for securitization, it cannot use that portfolio for investment purposes."

Under the plan, the corporation would not need Congress for funding, and would be more flexible than a government agency when it comes to rulemaking and employee compensation. The FHFA would regulate the NMRC. However, Congress would still have to approve a GSE merger.

Isaac Boltansky, an analyst with Compass Point Research & Trading, said in a note that while the chance for congressional action on the GSEs is still remote, the new proposal could be a significant contribution to the housing finance debate.

"While legislative GSE reform remains a distant dream at this point, the NMRC proposal represents a noteworthy mile marker in the policy conversation as it reinforces our belief that the mortgage finance debate in D.C. has shifted from liquidating the GSEs toward the consideration of a more simplified set of reforms," Boltansky said. "We do not see a legislative catalyst for GSE reform in the near term, but the framework outlined by this proposal is both operationally and politically sound, which leads us to believe that it will serve as the starting point for mortgage finance reform talks when the issue reemerges, especially under a Clinton White House."

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