The secondary market’s biggest trade and advocacy group issued a report Wednesday calling for the government to break up Fannie Mae and Freddie Mac into smaller private firms — a plan designed “to ensure liquidity for mortgages without presenting unnecessary risks for the taxpayer.” The blueprint, titled “Recommendations for the Future Government Role in the Core Secondary Mortgage Market”, would essentially do away with the government-sponsored mortgage sellers as they exist today. In their place, the MBA proposed a group of new companies empowered to securitize mortgages with government guarantees against defaults on the underlying loans. “It’s now been more than two years since the secondary mortgage market collapsed,” said Michael D. Berman, MBA’s vice chairman and head of the group of 23 experts who produced the study. “Rebuilding the secondary market is critical to restoring liquidity and confidence. The government has an important, limited role to play to ensure a stable flow of funds for mortgages.” Instead of the current system — in which investors assume the government will guarantee Fannie and Freddie on an ad hoc basis — the newly formed “privately-owned, government-chartered and regulated mortgage credit-guarantor” entities would contribute to a federal insurance program designed to cover regular payments to the securities investors if the firms are unable to make the interest and principal distributions. That might instill greater confidence in major foreign investors, like China, who dumped holdings in Fannie’s and Freddie’s debt last year when the U.S. government’s guarantees were in doubt.

Since then, federal authorities have placed the ailing mortgage securitizers into government conservatorship and pumped billions into their portfolios to keep them afloat. “If we’re going to restore and maintain investor confidence and…consistent liquidity, that is going to require an explicit backstop,” said John Courson, chief executive and president of the MBA. Shares of Fannie and Freddie stabilized Wednesday after dropping more than 17 percent the day before, on widespread reports that the firms were essentially worthless. As DS News previously reported, both companies saw their stock prices rise nearly threefold in August, but analysts remained skeptical about their value given the enormity of debt they owed to the Federal Reserve. Direct infusions of government capital to the firms currently stand at $96 billion. The MBA plan is a challenge to the Obama administration, which has said its own recommendations on an overhaul of the housing and financial markets will be released in early 2010. The administration might be reluctant to radically restructure Fannie and Freddie unless there is a dramatic upswing in housing markets. That’s because, as banks hunker down and the credit market remains drum-tight, the GSEs have been the government’s primary conduit for its loan modification and foreclosure-prevention programs. Along with the Federal Housing Administration, Fannie and Freddie give government backing to 90 percent of all new mortgages in the U.S. Borrower advocates, often sympathetic to the Obama administration, expressed concern that if Fannie and Freddie were replaced by a more modest private enterprise, access to home ownership would be denied to many more regular Americans. “If we learn the wrong lessons, we’ll create a system that doesn’t bring capital to underserved communities,” Sarah Rosen Wartell, of the Center for American Progress told the Wall Street Journal Wednesday.