Fannie Mae & Freddie Mac need to go, better alternatives exist : experts

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Gross: Take Out Private Incentives

Gross believes the U.S. real estate market is very fragile. Mortgage lenders have been scarred by the recent real estate collapse, he said. Consequently, they will demand “extraordinary down payments, impeccable credit histories, and [high] yields,” said Gross. In other words, private mortgage lending conditions will be prohibitively expensive for most home buyers.

It is “ludicrous” to expect the real estate market to heal “under the wing of the private market.” Government intervention is needed, said Gross. He suggested rolling Freddie, Fannie, and other government housing agencies into one giant agency, and then have it guarantee “a majority of existing and future originations.”

Unlike Freddie and Fannie, this giant agency would not be distorted by profit-seeking motives. Tight regulation, adequate down payments, and an insurance fund bolstered by collecting a small fee for every mortgage origination should protect taxpayers, said Gross.

Pollock: Take Out Government Involvement

The future of the mortgage finance system is a robust private market, said Alex Pollock, resident fellow at the American Enterprise Institute, a think tank based in Washington D.C.

In a private market, players would prosper or lose and the government would not be on the hook for losses. In addition, profit-seeking private players are likely to be more efficient than large government agencies, which may be bureaucratic and wasteful.

If government organization, with their advantages and guarantees, exited the market, private players would naturally develop, said Pollock.

Of course, because of the mess Freddie and Fannie are in, the government can't just simply privatize. Pollock recommended dividing Freddie and Fannie into three parts to address this issue.

The first part would be a “bad bank” to liquidate the bad loans accumulated by Freddie and Fannie. The second part would be the privatization of their operations.  The systems, human capital, intellectual properties, business relationships etc. of Freddie and Fannie should be put to good use in the form of private businesses.

The last part would consist of “activities that are properly those of the government.” These include “housing subsidies in one form or another and providing non-market financing of risky loans.”