By Steven Sloan

WASHINGTON — In one of the more unusual marriages that could result from the financial crisis, buzz is growing that the Federal Home Loan banks might purchase the government-controlled Fannie Mae and Freddie Mac.

The idea is very early in formation, according to five sources, and nothing has been put in writing. It could ultimately be shelved in favor of more straightforward approaches to Fannie and Freddie, such as nationalization or privatization.

But if it comes to fruition, it could put the 12 Home Loan banks in charge of their one-time competitors and finally give the system something it has longed for — the ability to securitize mortgages.

"Members need an avenue to securitize their mortgages," said a source close to the Home Loan banks. "Unless we have a healthy secondary market, it's going to be hard for mortgages to be made in this country."

Fannie and Freddie were seized by the government on Sept. 7 and the incoming Obama administration must decide how to resolve the companies.

Many questions surround the idea, including how Fannie and Freddie might be valued, how shareholders could be satisfied, and whether all 12 Home Loan banks are interested. Representatives at Fannie, Freddie and the Federal Housing Finance Agency did not comment.

The biggest upside for the Home Loan banks could be winning authority to securitize mortgages. The system has created several programs, most notably the mortgage partnership finance program, to become more competitive in the secondary market. But without securitization, which regulators have refused to allow, these efforts have come up short.

"The securitization business is probably the most opportune business" that Fannie and Freddie have, said Alfred DelliBovi, the president of the Federal Home Loan Bank of New York, who would not take a position on whether the system should purchase Fannie and Freddie. "It certainly is more viable than holding mortgages in portfolio."

Other sources said a purchase would take Fannie and Freddie off the government's hands and give the system far more political strength and control of the mortgage market.

Still, there would be steep hurdles to clear. For one, the Home Loan banks are barred from holding publicly traded stock. Though shareholders of Fannie and Freddie have been virtually wiped out in the aftermath of the government conservatorship, their needs would still have to be considered.

Another open question is whether the Home Loan banks can afford to buy Fannie and Freddie. On June 30 the 12 banks held $56.6 billion of capital, and some estimates suggest Fannie and Freddie would need roughly $60 billion to become adequately capitalized.

Some observers said that could be a nonstarter for the system, since the Home Loan banks would likely have to tap members for the needed capital. Member banks "in turn would have to go around and raise that capital, and banks are strapped for capital as it is," said Bert Ely, an independent analyst in Alexandria, Va.

Policymakers would also be faced with questions over whether a sale to the Home Loan banks would resolve investor confusion. When announcing the conservatorship in September, Treasury Secretary Henry Paulson argued that the government-sponsored enterprises' status as shareholder-owned companies that also serve public policy goals could not continue.

Selling Fannie and Freddie to the Home Loan banks, which are GSEs themselves, might not accomplish that.

"I don't know how people would see the cooperative, for-the-member approach at the Home Loan banks merge with the large, portfolio … approach at Fannie and Freddie," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Capital Markets Corp."

While the idea of the Home Loan banks purchasing the larger GSEs might seem outlandish, observers noted the system owned Freddie until February 1990.

"This would be back to the future," said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago who is now at the American Enterprise Institute.

 Richard Caudle

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