After months of silence, the Obama administration is close to spilling the best-kept secret in town: what it wants to do with Fannie Mae and Freddie Mac.
The administration is expected to unveil this month a reform package that charts a course for the housing finance system.
But it remains unclear how detailed the administration plans to be. The White House has already twice delayed the release of a concrete proposal, each time saying it wanted more time to study the issue without disrupting the market.
Meanwhile, it has offered few clues about what it is plotting, saying only that it would preserve some government role in the mortgage market.
"Whatever it is, it's going to be fairly modest and rely heavily on a continuing government guaranty of some shape or form — of either Fannie and Freddie continuing or some new entity that gets some explicit government guarantee and supposedly pays for it," said Edward Pinto, a fellow at the American Enterprise Institute and a former chief credit officer at Fannie.
Though the administration has said little, a consensus appears to be taking shape around the concept of some form of explicit government backstop in the event of a catastrophic loss.
There have been variations of the plan, but most would call for the creation of a small number of federally chartered, privately owned mortgage conduits. These companies would buy loans from the primary market and deliver them into a federally guaranteed mortgage-backed security.
In exchange for the guarantee, the conduits would pay a risk-based fee that would be used to establish an insurance fund, similar to that of the Federal Deposit Insurance Corp.
Supporters of such a plan argue that it would address the problems of the GSEs but retain the benefits of the current system. The private conduits — not the federal government — would take on the underlying mortgages' credit risk. The government would intervene only if a conduit failed. Such a system puts equity holders and creditors first in line for losses.
Many observers expect the administration's plan to take a similar approach.
Brian Harris, an analyst at Moody's Investors Service, characterized it as an "attractive plan," with the objective of ensuring there are "multiple entities to deal with systemic risk."
Jaret Seiberg, a financial services policy analyst at MF Global's Washington Research Group, agreed.
"We believe the odds favor a plan along the lines or something close to the utility model that has been previously discussed," he said.
But some argue that such a system would simply perpetuate past problems.
"A government guaranty has only one end, and that's failure," Pinto said. "Every time the government has tried to do any financial guarantee, it has been mispriced and ended up creating more problems and ultimately requiring some form of taxpayer bailout."
Former regulators agreed.
"People are going to have to be realistic," said Steve Blumenthal, a former deputy director at the Office of Federal Housing Enterprise Oversight. "Those who would simply like to do away with the GSEs and allow the private sector to develop a robust, private-label securitization market are unrealistic, and the impact on our economy would be dreadful. Similarly, anyone who thinks we can go back to the old model, either directly or thinly disguised through one of these conduit proposals, is [also] unrealistic. The future of the GSEs has to be more a utility-like, agency-like function that can be performed by much smaller institutions."
Complicating matters even further is that such a plan would probably be a nonstarter for Republicans, who are to take control of the House on Wednesday and would rather see Fannie and Freddie abolished.
"The House Republicans have been so strongly opposed to implicit guarantees for Fannie and Freddie that I can't see them buying it," said Bert Ely, an independent analyst in Alexandria, Va. "It goes against the direction of trying to reduce the amount of credit guarantee out there from the government and trying to reduce the subsidy. The so-called catastrophic loss or backup insurance is, in effect, a government guarantee of mortgage debt, however it gets characterized."
At the heart of the political debate is an ideological dispute over how much government support there should be for the housing market, and many believe this will be a major impediment to accomplishing a housing finance bill in Congress this year.
"The omnibus housing finance package just doesn't look like it'll have legs for the next Congress," Seiberg said. "There's simply not a consensus on what to do with Fannie and Freddie and the Home Loan banks. It's probably going to take most of the next Congress for any type of consensus to emerge."
Observers said they expect to see one or even two pieces of legislation dealing with Fannie and Freddie move in the House next year but that, even if they pass, are unlikely to succeed in the Senate, which is controlled by Democrats.
Republicans are likely to focus on resolving the issue of Fannie and Freddie's future as they exist in conservatorship as well as looking for ways to get the private sector back into housing finance.
"We need [a] transition from a government-controlled mortgage market, with Fannie and Freddie, to a privatized market, and that will be a long-term goal," Rep. Spencer Bachus, the incoming chairman of the House Financial Services Committee, said in a recent interview.
But Senate Republicans have already urged a more cautious approach in terms of moving toward privatization.
"You can't do it precipitously, obviously," said Sen. Judd Gregg, R-N.H. who completed his last term on the Senate Banking Committee before retiring. "At minimum we should bring it on budget so we know what the liability is and we are actually accounting for it in the budget process. But to precipitously say, 'Well, there's no more guarantee,' that would probably cause high disruption in the housing market."
Another issue that lawmakers must tackle is the likelihood that continued conservatorship of Fannie and Freddie will inevitably make it harder to break away from the existing model and eventually lead to nationalization. "We should not keep them in conservatorship any longer than necessary," said Sen. Mike Crapo of Idaho, who is to be the No. 2 Republican on the Senate Banking Committee.
In the end, success in GSE reform is unlikely to be seen for years.
"How do you construct a structure that makes everyone happy? It probably needs to make everyone unhappy, in some respect," said Harris, the Moody's analyst. "That's when you know you've done it successfully — when everybody is a little unhappy."