Scaling back would have essentially meant tighter and more-restrictive lending guidelines. For borrowers, this would mean larger downpayments and more-restrictive credit-score requirements to get loans. As a result, more of these borrowers would have been priced out of the homeownership market -- not because of borrowers' higher risk but because Fannie and Freddie did not have the capital to continue buying as many mortgages.

The government-takeover plan empowers the Treasury Department to inject as much as $200 billion of capital in the companies -- or $100 billion investment in each. This means that Fannie Mae and Freddie Mac are no longer forced to slow down their mortgage-buying activities and further restrict lending guidelines.

Therefore, although guidelines probably won't get looser, at least Fannie and Freddie are not forced to tighten their lending guidelines because of lack of capital.

Higher rates and restrictive guidelines

A big issue with the government's plan in placing Fannie Mae and Freddie Mac under conservatorship is that it does not have an exit plan or a schedule for potentially breaking up and re-privatizing the companies. It is thought that continued government

involvement in these companies will only serve to harm consumers who don't meet conventional-lending guidelines. For borrowers who need a jumbo or nonconforming loan -- a large segment of the marketplace -- this will contribute to increased interest rates and a limit on mortgage and homebuying options.

Certainly, homeownership is a noble cause, and Fannie Mae and Freddie Mac have helped promote that cause. But just because their business benefits the public doesn't mean that they deserve to be backed by taxpayers and the federal government in the long term. After all, many other businesses also benefit the public, such as food-service companies, energy companies, technology companies, and auto and transportation businesses. Just as it is not the government's mission to be the biggest player in those businesses, it likely should not be the biggest player in the mortgage business.

What makes today different from the Great Depression era, which gave birth to direct government involvement in the mortgage business, is that financial markets are more sophisticated. Money for U.S. mortgages comes from all over the world, with foreign investors, central banks and sovereign wealth funds clamoring for places to invest their funds. In fact, covered bonds have recently been cited as one way to attract capital to the U.S. mortgage markets and replace the collateral debt obligations and other complex investment vehicles of the past. With covered bonds, banks keep the mortgages on their balance sheets and must replace any loans that default.

But privately issued mortgage-backed securities and covered bonds that do not have government backing will have a difficult time competing with the Fannie- and Freddie-issued securities that do have the government's full faith and backing.

These issues and risks can best be addressed by breaking up and completely privatizing Fannie Mae and Freddie Mac, removing their GSE status permanently and cutting off their lifeline to the federal government. In other words, it is time for the parents to let go and allow their children to be responsible adults and functioning members of society.

Under a full-scale privatization scenario, the government's role would be to create a regulatory environment in which Fannie's and Freddie's independent, smaller components, along with all other financial-market participants, can compete with one another and operate responsibly on their own without creating unnecessary risks for all other market participants. This can serve to bring long-term stability to the U.S. mortgage, real estate and financial markets.

Gibran Nicholas is a professional writer, speaker, entrepreneur, and founder and chairman of the CMPS Institute, which administers the certified-mortgage-planning-specialist (CMPS) designation. The CMPS Institute has enrolled more than 5,500 members since it began in 2005. It empowers mortgage originators with credentials, financial knowledge, inside information and resources to overcome the fear and indecision that clients and referral partners face in today's environment. To learn more about becoming a CMPS, call (888) 608-9800 or visit www.CMPSinstitute.org.

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