Peter Wallison from the American Enterprise Institute and a well-known advocate of GSE reform, wrote an op-ed piece for thd Wall Street Journal that deserves your read. Highlights:

Fannie and Freddie are using the recent market stumble to argue that allowing them to buy and hold more mortgages in their portfolios would “add capital” to the mortgage markets. Their motives are clear: Holding mortgages is profitable — much more so than creating pools of mortgages and selling mortgage-backed securities (backed by these pools) to investors. The motives of those in Congress and elsewhere for supporting this change in regulatory policy are much less clear, since whatever Fannie and Freddie might do for the beleaguered mortgage markets through purchasing and holding mortgages they can also do through securitization — and with a lot less risk to the taxpayers …

Subscribers can read the full letter. Wallison goes on to expound on the differences between credit risk and interest-rate risk, and puts on a pretty good show of how to explain the concept of interest-rate risk in layman’s terms. (For those who aren’t familiar with the concept: the GSEs fund whole loan purchases with short term funds, and the rates on these funds are either greater than or lower than the average interest rate on whatever pool they’re purchasing — and being in either position entails risk.) All of which leads Wallison to conclude that whole loan purchases represent a “high risk, high reward” game, while securitization is a “lower risk, lower reward” game — precisely because securitization of loans backed by Fannie or Freddie doesn’t entail the same exposure to interest-rate risk. It’s an interesting argument, even if it’s only one aspect of what to me is a much larger puzzle. Nonetheless, many on Capitol Hill are now arguing that opening up portfolio limits should be done in the name of helping Johnny Subprime; Ellison suggests that we could end up screwing an entire nation of taxpayers should we blindly allow portfolio growth.