Do New Fannie-Freddie Bonds Signal Return of Asset-Backed Securities?

Ironically, that would block the reduction in mortgage risk borne by taxpayers through Fannie and Freddie's effective ownership of private mortgages.

Bostrom estimates that Fannie and Freddie are buying some 70% of U.S. mortgages, with Ginnie Mae, the Veterans Administration and the Federal Housing Administration buying another 20%. That leaves just 10% in the hands of private investors, mainly banks. For comparison, GSEs owned just 40% of mortgages in the 2007 market.

"The banks don't have adequate capital to hold large amounts of mortgages on their balance sheets," Bostrom says. "Basel III will make that worse." That's why bringing private investors into the market through risk-sharing bonds is so important, he says.

Bostrom says the risk-sharing bonds would appeal to investors seeking higher yields than conventional mortgage-backed securities.

"It's such a critical policy initiative of the government and Congress to transfer one portion of the housing market back to the private sector." For the past five years, that burden has rested on the taxpayers' backs.

"If there were ever proof that the economy needs government support when times are bad," it's the financial crisis, Bostrom says. "There has to be a backstop to support the market. Otherwise you'd have a complete collapse of the housing market. There'd be no mortgages."

The securities lawyer says that, while GSEs are fulfilling a vital role today, broadly supported alternatives should be encouraged where possible. He cited "consumer groups" as the only parties that might potentially oppose increasing private investment in mortgages because the mechanics of opening up financing would initially result in "modestly higher" mortgage rates.

Aside from a CFTC exemption stating no enforcement actions will be taken against asset-backed securities holding swaps, Bostrom said the other key reform would be the Consumer Financial Protection Agency providing safe harbor protection for banks selling qualifying residential mortgages to private investors.

"The seller has to absorb 5% of the first loss if loans don't satisfy whatever conditions are put into the regulations. To the extent that the conditions are interpretive and not absolutely certain, it leaves the seller in doubt," he says.