Federal Housing Finance Agency Director James Lockhart outlined several possible frameworks on Wednesday for the future of Fannie Mae and Freddie Mac.

Though Lockhart did not take a firm position at a House Financial Services capital markets subcommittee hearing on the government-sponsored enterprises, he laid out various pros and cons for ideas on how to reconstitute them. He also advocated giving his agency a role in preventing systemic risk, and lobbied for it to have a seat on the Federal Financial Institutions Examination Council's board.

Lockhart said he believes government insurance programs create incentives for the private sector to shift risk to the government. He suggested charging premiums for catastrophic reinsurance for the secondary mortgage market.

Among the ways to continue federal backing for the secondary mortgage market, Lockhart said the GSEs could be used as one of three things: a liquidity provider of last resort for the secondary market for mortgage-backed securities and other asset-backed securities, a catastrophic risk insurer of the credit risk of conventional mortgage bonds or a provider of subsidies to increase the supply or reduce the cost of mortgage credit to targeted borrowers.

The mission of Fannie and Freddie must be considered carefully to avoid conflicting goals, Lockhart said.

He acknowledged that nationalization is on the table, but he said he opposed the idea, because it could invite moral hazard by enabling excessive risk. Alternatively, he said, the GSEs could be made into purely private-sector companies, merged with the Federal Housing Administration or the Government National Mortgage Association, kept as GSEs or made into a public utility.

"Regardless of the choices Congress and the administration make about the future of the enterprises, a number of cross-cutting issues will have to be addressed," he said.

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