January 7, 2009

Paulson says GSEs need a new structure

U.S. Treasury Secretary Henry Paulson Jr. Wednesday called for restructured models for the nation's largest mortgage brokers.

The Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association, grew to their enormous sizes -- holding collectively $5.4 trillion in debt obligations -- in part due to the misconception that they were government-backed enterprises, Paulson said.

But, with its most recent steps to purchase pump $600 billion into the companies, the federal government has gone about as far as we can to avert systemic risk and to use the GSEs (government-sponsored enterprises) to speed progress through the housing correction, he said.

Since the GSEs fell into conservatorship in September, almost all new mortgage market originations have federal government credit support, Paulson said.

This is not sustainable over the long-run, he said.

In a prepared speech before the Economic Club of Washington, Paulson outlined options for moving forward, including expansion of the Federal Housing Administration and Government National Mortgage Association and creation of a Ginnie Mae-like entity for non-FHA mortgages that would offer a partial guarantee to the industry.

Paulson also said a utility-like entity could be set up with pre-established rates of return.