No Easy Answers on Liquidating Fannie and Freddie

Now that the White House has decided to pull the plug on Fannie Mae and Freddie Mac, the next question becomes: How do you liquidate roughly $1.5 trillion of MBS and whole loans sitting on their books?

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According to investors, advisors and mortgage executives who for decades have done business with the GSEs, the answer is not easy. In fact, some suggested the two should not be liquidated at all, with their assets instead being allowed to "run off" over many years.

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Meanwhile, Republican lawmakers and conservative think-tank analysts believe a private mortgage market eventually can emerge—but only if Fannie and Freddie disappear. "A private secondary market for prime, middle-class mortgages cannot develop while the GSEs wield market power derived from their government granted advantages," said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago.

Pollock, who once created a FHLB program to compete against the GSEs, said the first step to creating a private market is to tell the industry how rapidly the government will reduce the conforming loan limit.