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It’s only January but we may already have a winner for sheer audacious rent seeking of the year award. The NYT reports that the nation’s big banks would like to be named as replacements for Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC):

Wells Fargo and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee.

The banks have presented their ideas publicly through trade groups. Housing industry consultants and people familiar with recent meetings at the Treasury Department say these banks view the government’s overhaul of the mortgage market as a potential profit opportunity. Treasury officials have met with executives from several institutions, including Wells Fargo, Morgan Stanley, Goldman Sachsand Credit Suisse, according to a public listing of the meetings.

The administration’s report, to be released later this month, is expected to be sweeping and could address basic questions like whether a government guarantee is needed at all for middle-class homeowners. While other arms of the government are dedicated to making loans available to lower-income borrowers, Fannie and Freddie have helped lower rates for the bulk of homeowners. Some Republicans are trying to narrow this broad role, and on Thursday, several conservative researchers released a proposal on how to do so. But banks, for their part, have told the administration that removing the guarantee would wipe out the widespread availability of the 30-year mortgage, fundamentally reshaping the American housing market. Though some other countries do not promote long mortgages, some analysts warn that such a change would be devastating to the market here. At firms like Goldman, analysts are predicting that a government guarantee on a broad swath of mortgage securities will survive in some form.

If you are rubbing your eyes and rereading this because you thought it said that the banks want to be able to originate mortgages and then stamp them with a government guarantee, don’t bother wasting anymore time. That’s pretty much what they are proposing.

All of this is important because the Obama administration is supposed to come up with a plan for the future of mortgage finance sometime this month. The stakes both political and economic are huge. Maybe more to the point, it is a once in a generation chance to reform the entire system and bring some sense to the role housing plays in the economy.

The housing establishment — banks, realtors, home builders, appraisers, title companies, investors — have shown little inclination to champion change over the status quo. A housing finance system with government subsidized 30-year fixed rate mortgages appears to be their default position. This despite the fact that system has proven to be a driver of recurring over-investment in housing leading to booms and busts as well as severe financial crises.

So how could you reform the system? Peter Wallison, Alex Pollock and Edward Pinto have crafted a proposal for the American Enterprise Institute which pushes mortgage finance towards a private solution. They suggest a system which is organized on these principles:

1. The housing finance market—like other US industries and housing finance systems in most other developed countries—can and should principally function without any direct government financial support.

2. To the extent that regulation is necessary, it should be focused on ensuring mortgage credit quality.

3. All programs for assisting low-income families to become home-owners should be on budget and should limit risks to both homeowners and taxpayers.

4. Fannie Mae and Freddie Mac should be eliminated as government-sponsored enterprises (GSEs) over time.

Their paper is extensive (it’s 38 pages) but not wonky. It takes some time to read but it is worth the effort. In it they refute the notion that investors will not buy mortgage paper that is not guaranteed by the US government, debunk the myth that 30-year fixed rate mortgages would vanish without a guarantee and demonstrate that the Frannie system performs poorly when compared to systems of other developed countries which do not depend on guarantees.

Stick around for this battle. It’s going to be epic.

Source: Reshaping Mortgage Finance: Banks Replacing GSEs?