That’s what the Mortgage Banker’s Association (MBA) said earlier this week. The MBA is a trade-group for companies involved in the home-financing industry. With over 3,000 member companies employing 350,000 professionals, it’s no surprise they carry some clout in Washington.

Their proposal suggests that instead of two government sponsored entities (GSEs) there should be host of smaller mortgage buyers. Each company could purchase mortgages on the open market, they would pay a fee to the federal government to get the same kind of guarantee Fannie and Freddie enjoy. By providing guarantees on mortgages the government has successfully kept mortgage rates low for quite some time. Without such a guarantee, rates would be more volatile and likely average a hundred basis points or more higher than they have historically.

If you’re thinking that we should just ignore the government guarantee and let the free market take over completely, then you must make the same argument for getting rid of the FDIC, so put your pitchfork down.

The MBA isn’t alone in supporting this change. Some economists, politicians, and even people without a self-righteous agenda have all agreed on this. Of course I’m not saying the majority do, just that some have.

It’s unfortunate that the MBA decided to make their announcement this week, as it will mostly fall on deaf ears. Obama and Co. are way too busy with the healthcare issues, an unstable economy, and the start of the NFL season to get distracted with finance reform. There is simply no way anyone in Washington is going to focus on this.

But you and I are still interested so let’s at least play a game and assume Fannie and Freddie are going to get tossed. What might the new system look like?

One option is like what the MBA said above: Allow a number of smaller firms to purchase mortgages and pay a fee to the government for some kind of guarantee. The problem I see with this is you could still have them band together and get just as much lobbying power as Freddie and Fannie enjoyed. The advantage is you’ll have a number of competing firms and they won’t be government insiders at the same time. I’d prefer it to what we’ve got now, but it might not be the best.

But the only real problem that ever needed fixing was that the government was too close to Fannie and Freddie to begin with. They passed legislation the specifically encouraged the two giants to buy up crappier loans. It’s not out of the question to ask if this legislation was the direct result of lobbying from the mortgage giants.  The MBA idea would solve this problem, but their method still requires the government to wind them down.

I’d like to just see a greater separation between Freddie/Fannie and the government. Cut the cord and let them survive on their own. The market will gradually pull back on their market share, and we’ll eventually find a new balance. I do like the FDIC like guarantee program from the MBA suggestion, I’d just rather let the market eliminate Fannie and Freddie if the market deems it necessary.

As for the worry of smaller firms banding together, you get that in every other industry and it’s nothing some good lobbying reform can’t change.

But like I said before this kind of change isn’t going to happen anytime soon, and my bet is it won’t happen at all. So what’s your take? Should they be dissolved? If so, how would you want the new mortgage buying industry to look?

Photo: futureatlas.com

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: banking, government