WASHINGTON — Treasury Secretary Henry Paulson said Wednesday that the best option for the future of Fannie Mae and Freddie Mac could be for the mortgage giants to be run like public utilities.
In what could be his last speech as secretary, Paulson said allowing the companies to return to their previous operating approach was not an option.
Fannie Mae and Freddie Mac were taken over by the government in September and placed in a conservatorship after mounting mortgage losses put them in operating distress that was a prelude to the broader financial crisis that hit Wall Street last year.
Under Paulson’s proposal, Congress would replace Fannie and Freddie with one or two private- sector entities that would purchase and securitize mortgages with a credit guarantee backed by the federal government. The new companies would be privately owned but governed by a rate-setting commission that would establish a targeted rate of return, he said.
Paulson said this approach “could be the best way to resolve the inherent conflict between public purpose and private gain.”
Congress and the next administration must decide the proper role government should play in supporting homeownership in light of the severe economic costs imposed from the bursting of the housing bubble, Paulson said.
“With the knowledge of recent experience, we have a responsibility to begin work now on a long-term (government-sponsored enterprise, or GSE) structure which avoids the dangerous mix of policy and market distortions created by the former flawed GSE mode,” he said.
Paulson offered his thoughts on a variety of possible solutions in his remarks before the Economic Club of Washington. He found fault with most of the other proposals he examined.
