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Fannie Mae and Freddie Mac reform: Would it add $5 trillion to US debt?

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"The hit to the economy [from the recession] would have been measurably greater" without the GSEs and the Federal Housing Administration, said economist Mark Zandi of Moody's Analytics. By guaranteeing or insuring mortgages, these agencies enabled credit to keep flowing for typical home loans even as home values were falling and the private-sector channels of mortgage finance had dried up.

The Obama adminstration hasn't outlined its approach to GSE reform, which was notably missing in the financial-reform law the president signed recently. The conference represents a first step, at least in public view, toward developing a proposal.

The battle in Congress, expected to ramp up early in 2011, will reflect a sharp partisan split that's existed for years. Republican lawmakers emphasize the importance of scaling back government's role in the housing market and limiting taxpayer exposure to losses. Many Democrats emphasize the risks of providing too little support for the housing market, given housing's prominent role in family wealth and in the economy's ups and downs.

Both sides of this debate were represented in Tuesday's panel discussions. Many participants from the private sector – including Mr. Zandi – said the government should eventually scale back its role in the housing market significantly.

At the same time, many said government mortgage guarantees should continue to be available in some carefully managed forms.

At least one participant, bond-fund manager Bill Gross of the investment firm PIMCO, suggested that government guarantees should apply to virtually all mortgages. He said this results in mortgage interest rates that are about 3 percentage points lower than if the only mortgage insurance came from the private sector.

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