One blueprint for turning Fannie Mae and Freddie Mac into privately run enterprises that is getting some play at Treasury comes from Redwood Trust — the firm that made headlines this spring when it pulled off the first private-label jumbo securitization in almost two years.

In a comment letter, Redwood chief executive Martin Hughes outlined a plan for transferring Fannie and Freddie's infrastructure to a lender-sponsored cooperative (LSC) that would continue to guarantee prime conforming mortgages during a 10-year transition period.

The co-op members would capitalize the LSC and take a first-loss position on the MBS with a "backup" guarantee from the federal government — possibly by Ginnie Mae. The LSC would collect a fee that covers the cost guarantee, including a loan loss reserve.

"Ginnie Mae would receive a portion of the guarantee fee and be protected by multiply layers of credit enhancement," Hughes says in his comment letter to Treasury.

Officials close to the situation said Redwood's ideas are getting a receptive audience in certain government circles.

Credit enhancements would, among others, include strict and safe underwriting, sizeable downpayments and mortgage insurance.

"Ideally, the long-term solution would not rely on a government guarantee, except for a very limited part of the market. In the interim, however, the LSC model is a practical and necessary transition away from a market 70% dominated by Fannie Mae and Freddie Mac," Hughes said.

Early next year Treasury will publicly unveil its plan for revamping the two. A few months ago Treasury solicited comments from the public, receiving 149 responses to some very general questions about housing finance system. The Redwood Trust CEO responded with what he calls an "actionable transition plan."

The LSC approach provides an "uninterrupted flow of mortgage credit to borrowers, while also significantly reducing the excessive reliance on government financing and resulting burden on taxpayers."

During a 10-year transition period, the conforming loan limit would be gradually reduced to $325,000 and the LSC would be phased out as private capital fills most of the market needs.

The Federal Housing Administration, Department of Veterans Affairs and Ginnie Mae would continue serve their public purpose.

"There should be no hybrid enterprises, like Fannie Mae and Freddie Mac, operating with a foot in both worlds. The inherent conflicts that inevitably result from a public/private hybrid model have proven to be destructive and could prove to be destructive again," Hughes said.

Redwood's approach would leave the GSEs' mortgage portfolios and debt in a government receivership.

The GSEs have been in conservatorship since September 2008 but still control 70% of the origination business through their guarantees.

Recently, a Morgan Stanley economist urged Treasury to wake up to the fact that government is on the hook for all of Fannie and Freddie's loans.

David Greenlaw argued the Obama administration is missing an opportunity to stimulate the economy and reduce defaults and foreclosures by not opening the refinancing spigot.

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