The future of our nation’s housing finance system looms large over the agenda on Capitol Hill.

But the debate over what to do with Fannie Mae and Freddie Mac will begin a little later than anticipated. The Obama administration was expected to roll out its framework proposal by the end of January, but that timeline has been pushed back to mid-February.

“On the hill, hearings have started to be teed up both to go over the administration’s proposal as well as to get input from the stakeholders. Now, that’s been thrown into a bit of confusion,” says Michael Berman, chairman of the Washington, D.C.-based Mortgage Bankers Association (MBA). “We are anxiously awaiting having the train pull out of the station.”

One of the biggest sources of conflict in this debate will be to what degree the federal government should be involved in our nation’s housing finance system. Opinions are sharply divided over the possibility of an explicit federal guarantee around the mortgages issued by the next generation of housing finance entities.

One Set of Plans
In September 2009, the MBA rolled out its proposal for a system of mortgage credit guarantor entities (MCGEs) that would replace Fannie Mae and Freddie Mac. The MCGEs would be privately owned, government-chartered entities that provide loan-level guarantees. Backstopping that would be an explicit federal government guarantee wrap, much like what Ginnie Mae does with FHA loans.

The MBA says that its proposal has gained momentum. “We’ve begun to see a coalescing of opinion over the last months behind the general outline the MBA has developed,” Berman says. “It’s safe to say that the proposal has been well received.”

Yet the proposal certainly has its detractors, many of which are on the Republican side of the aisle. Last week, the American Enterprise Institute, a conservative think tank, issued a white paper titled “Taking the Government Out of Housing Finance.” The white paper argues that the presence of a government guarantee, explicit or implicit, is what got us into our current mess, and that a free-market, entirely private system is preferable.

“We believe that there is a robust alternative to government support of the housing finance system,” the white paper says. “Our alternative approach is to ensure that only prime-quality mortgages, which comprise the vast majority of U.S. mortgages, are allowed into the securitization system.”

Keeping the Balance
Still, the importance of counter-cyclical liquidity—of capital being available though good times and bad—necessitates a role for the federal government, Berman says. “In order to ensure liquidity through times of economic stress, as we’ve just experienced, and to keep down the volatility of the mortgage markets, we do need some sort of government role in the form of the explicit government wrap around mortgage-backed securities,” Berman says.

Berman pointed to the last three years as an example of the danger of a fully private, free market system, saying that single-family and multifamily mortgages would’ve been “nearly impossible to get, and for what was available, the rates would be extraordinarily high.”

The Center for American Progress (CAP), a progressive think tank which has the Obama administration’s ear, issued a report January 27 calling for a system that’s privately capitalized, but with an explicit government guarantee that would be paid for by the next generation of housing finance entities. To CAP, that guarantee takes three forms: direct government support for affordable housing; a government backstop for middle market deals; and for luxury assets, government financial intervention would only occur when the mortgage markets freeze.

In essence, the left and right sides of the aisle agree on one important principle—that taxpayers must be protected. Under the old system, Fannie Mae and Freddie Mac inhabited a unique space in the business world—publicly traded companies that were chartered by, and implicitly backstopped by, the federal government. Under such a system, profits were privatized, but losses, ultimately, were socialized.

Under the MBA’s proposal, a series of taxpayer protections are included, such as an FDIC-type insurance fund, a strong regulator that ensures adequate capitalization of the MCGEs, and a limit on the kinds of mortgages that would be securitized.

While many of the proposals issued from across the ideological spectrum look good on paper, now comes the hard part—forging consensus in a bitterly divided Congress.