Mortgage insurance companies, which have been bleeding massive amounts of red ink for two years, could see their prospects brighten in a post-Fannie Mae/Freddie world, according to one proposal making the rounds in Washington.

The Financial Services Roundtable (FSR), a trade group whose members include the nation's largest banks and insurers, is actively promoting a plan to eliminate the GSEs and replace their MBS guarantees with policies written by truly private firms.

One MI official, familiar with the FSR's Talking Points memo on the GSEs, noted that indeed mortgage insurers could have a role in being the guarantors standing behind MBS in a post-Fannie/Freddie world. "It's one idea being seriously considered in Washington," said one MI source, requesting his name and company not be identified.

The first losses would be covered by what the FSR calls "MSICs," which under its plan would be tightly regulated by the Federal Housing Finance Agency, the agency currently regulating the GSEs.

These MSICs could be formed by any of the nation's seven active MI companies as a side business. The trade group thinks up to eight MSICs might ultimately serve the housing market. (Not only might MI firms participate, but other insurance firms as well.)

After the private guarantees are exhausted, the government would pick up any remaining losses, but according to FSR's Paul Leonard, the government would guarantee the MBS itself, not the company issuing the bond.

At least two MI firms — Genworth Financial and the PMI Group — are members of the FSR and are involved with its Housing Policy Council (HPC), which was formed seven years ago to deal with housing and mortgage issues. Leonard serves as vice president of government affairs for the HPC.

Seller/servicers that underwrite and sell mortgages that go into the new MBS would pay risk-based premiums for any type of explicit federal guarantee.

As for when exactly the federal guarantee kicks in after private insurance is exhausted, Leonard said he was not sure about the details but noted that losses would have to be "extreme —comparable to the current meltdown."

He said the FSR has talked to the Treasury Department and testified publicly about its MSIC idea.

The Talking Points memo making the rounds of Capitol Hill notes that the GSE "hybrid" structure must be eliminated. Any MSICs that are created will not have government backing of any sort and should be allowed to fail, the group believes.

Also, MSICs would not have to meet any type of affordable housing mandate, something Fannie and Freddie currently are required to do. (The MSICs, though, would have to contribute revenue into an affordable housing fund.)

The FSR's plan would concentrate solely on "A" paper loans that are carefully underwritten, not private-label securities.

This week, the Treasury Department holds its first public forum on the future of America's housing finance system, a debate that will center around the GSEs.

Lewis Ranieri —the co-inventor of the MBS —and bond market maven Bill Gross are among a group of 12 speakers testifying Tuesday in Washington.

Treasury secretary Timothy Geithner and Housing secretary Shaun Donovan will moderate the discussion, which will occur between 9 a.m. and 1:30 p.m.

Also speaking is Barbara Desoer, president of Bank of America Home Loans, the nation's second largest residential funder. B of A's mortgage operations include Countrywide Financial, once the nation's largest subprime lender. Mike Heid, co-president of Wells Fargo Home Mortgage, and S.A. Ibrahim, CEO of Radian, also will make presentations.

Gross is co-founder and chief investment officer of PIMCO. Ranieri, who pioneered the MBS market in the early 1980s when he was at Salomon Brothers, is chairman of Ranieri & Co.

The Treasury Department is working on a draft proposal to reorganize Fannie and Freddie and hopes to release its blueprint early next year. Currently, the two GSEs account for 70% of all residential loans funded in the U.S.

The Federal Housing Administration accounts for most of the balance. Jumbo and nonconforming lenders account for a fraction of today's market, according to figures compiled by National Mortgage News.

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