Paulson favors abolishing Fannie, Freddie

WASHINGTON — Treasury Secretary Henry Paulson on Wednesday called for abolishing Fannie Mae and Freddie Mac and replacing them with highly regulated utilities that would play a more narrow role in supporting the U.S. housing finance system.

In what the Treasury Department billed as his last speech as secretary, Paulson addressed the future of Fannie and Freddie, which together own or stand behind about half the nation's home loans.

Under Paulson's planning, the two companies were seized by the government in September as the nation's economic crisis entered a critical phase.

Paulson said Wednesday the two companies should be replaced by private entities that would purchase and bundle mortgages that, in exchange for a fee, would carry U.S. backing in the case of default.

The companies guarantee mortgages against default today, but until being taken over by the government last fall, the bundled loans, known as mortgage-backed securities, carried no official U.S. backing.

Paulson said, however, the new entities would not hold investment portfolios. Fannie and Freddie own about $1.5 trillion in mortgages today, holding and trading them just as a mutual fund would hold and trade stocks.

The companies were hit by billions of dollars in losses both in their investment portfolios and in their guarantee businesses as the housing and mortgage downturn worsened.

Paulson compared the new entities to public utilities. He said they would be funded by private capital, but a commission would be created to establish a maximum rate of return, limiting the profit-seeking behavior of private companies.

The commission would ensure that only creditworthy mortgages are guaranteed.

Paulson said this proposal was geared toward a long-term fix for Fannie and Freddie.

In the short term, he favors the government using Fannie and Freddie to bring down mortgage rates, potentially even strengthening U.S. government backing for the firms.

He said the new administration could consider steps to bring mortgages as low as 4 percent.