Austin Kilgore | 01.09.09  www.dsnews.com

Outgoing Treasury Secretary Henry Paulson suggested four different strategies for the future of Fannie Mae and Freddie Mac, according to a Marketwatch.com story.

He said the future of the two government-subsidized entities will either be nationalization, privatization, or one of two hybrid approaches.

“The first step must be for policymakers to decide - in light of the recent housing bubble and the severe financial and economic penalty it has imposed on our nation - the role government should play in supporting home ownership,” Paulson told observers at the Economics Club in Washington.

According to the story, Paulson said the conservatorship the Treasury put Fannie and Freddie in must be a temporary action, and that outright nationalization is “less than optimal.” He added full privatization would minimize risk, but was he is skeptical of that plan.

He also discussed a hybrid solution that would make the housing entities like Ginnie Mae, but for non-Federal Housing Authority mortgages, which could provide partial guarantee for mortgage-backed securities.

"While such a hybrid program would clearly define the extent of the government's guarantee, developing risk sharing parameters compatible with profit incentives would be as problematic, and potentially as inefficient, as in the current GSE structure," Paulson was quoted in the story.

The second hybrid option would establish a mortgage credit guarantor, where Congress would replace Fannie Mae and Freddie Mac with private entities that would purchase and securitize mortgages guaranteed by the federal government, and would be under the oversight of a rate-setting committee that would also approve mortgage products.

New York Federal Reserve Chairman Timothy Geithner is set to replace Paulson as Treasury Secretary when he is confirmed by the Senate after President-elect Barack Obama takes office.