A US Federal Reserve economist called on Sunday for the creation of a new federal institution to backstop losses on asset-backed securities (ABS) to prevent any future collapse of mortgage finance giants Fannie Mae and Freddie Mac.
The government had to take over the mortgage finance companies in 2008 as a devastating financial crisis worsened. The two had been shareholder owned, but their congressional charters and Treasury lines of credit lent their debt securities a status just short of US Treasuries in the eyes of investors.
“There ought to be government-backed ABS,” said Fed economist Wayne Passmore in a presentation to the American Economic Association.
Atlanta Federal Reserve Bank president Dennis Lockhart participated in the session, but did not make any comments.
Fannie Mae and Freddie Mac, even under government control, play a major role in US mortgage finance, and US President Barack Obama has promised to propose early this year how the companies should be structured in the future.
Passmore and Fed economist Diana Hancock argued for the creation of an agency that would guarantee all forms of asset-backed securities. It would be capitalized by insurance premiums charged to financial institutions, much like the current Federal Deposit Insurance Corp system, Passmore said.
“It resolves the problems associated with systemic risk,” Passmore said.
Fannie Mae and Freddie Mac, he argued, should also expand to securitize a host of new assets, such as credit cards portfolios, that the private sector already handles.