Nearly five years after entering conservatorship, Fannie Mae and Freddie Mac have captured many critics - a few public supporters - and a great deal of pushback for being the last-standing vestiges of the pre-housing bust era. 

Yet, what happens to the institutions from here is the subject of much debate, and the discussions intensified at a hearing of the U.S. House Financial Services Committee on Wednesday when both Democrats and Republicans took aim at the GSEs and debated their unique roles in the future housing market.

The level of agency debt is "massive and has exploded" during the last 40 years," suggested John Ligon, policy analyst for the Center for Data Analysis at The Heritage Foundation. In 1970 agency debt as a share of U.S. Treasury debt was 15%. In 2010 that percentage share skyrocketed to 81%, a combined $7.5 trillion, Ligon said.

Ligon noted during the hearing that after more than three decades of experience with boom and bust cycles within the housing market, affecting not only household income, but also financial markets, it’s time to pull the plug on the government–sponsored enterprises. 

"Eliminating the present role Fannie Mae and Freddie Mac play in the U.S. mortgage market could save billions of taxpayer dollars in the U.S. mortgage market through eliminating the subsidy that has induced U.S. households to take on more debt-related consumption, ending up underwater," Ligon stated. 

Furthermore, Ligon said the GSEs played a central role in the collapse of the financial market and that it's necessary to learn from previous failures in order to restore properly aligned incentives to the housing industry and the mortgage finance system.

"Congressional leaders made the mistakes of creating Fannie Mae and Freddie Mac and subsidizing their activity in the U.S. mortgage market through special access to federal funds and an implicit guarantee prior to federal conservatorship in 2008," Ligon told the House Committee. "They need to wind down the GSEs and establish a U.S housing finance market free of the distortions this institutional arrangement generates." 

On a similar note, Sen. Elizabeth Warren, D-Mass., amplified the need for FHFA and GSE reform while still managing to shrink the government’s footprint in the mortgage finance market. 

"We’ve got Fannie Mae and Freddie Mac that are creating a huge problem and to some extent the Veteran's Administration as well as when we think about underwriting and insurance pricing," Warren said.

In contrast, Managing Director Joshua Rosner of Graham Fisher & Co. noted there is nothing specifically wrong with the existence of Fannie Mae and Freddie Mac and said there's even "a substantial need for such a function to exist."

"The problem was the use of quasi-private institutions as tools of social policy for the purpose of driving housing subsidies to the market through a perverse off-balance-sheet subsidy that was arbitraged by private market participants," Rosner said. 

While the GSEs have become the subject of charged debate in Washington, Rosner identified that before the conservatorship of the GSEs, both served as valuable tools of financial intermediation.

Instead of eliminating the GSEs entirely, Rosner suggested repairs that are achievable to place the Enterprises in their proper role "as counter-cyclical buffers supporting the private mortgage market." 

In support of a functioning secondary mortgage market, the Treasury should seek repayment of $140 billion it is owed by the GSEs, according to Rosner. Additionally, he wants to sever the government’s sponsorship of Fannie and Freddie to prevent the provisioning of an implied government guarantee or inherent conflicts between the agencies’ public, political and private purposes.

Furthermore, he wants to prevent the deterioration of underwriting standards through both private market mechanisms such as greater data disclosure and better regulation. 

Also, Rosner wants to limit the GSEs activities exclusively to prime borrowers to ensure banks are able to use the GSEs as liquidity tools for funding new mortgages rather than as risk-transfer mechanisms. 

Additionally, he recommends ensuring proper equity capital levels by raising guarantee-fees to market levels and limiting the portfolios for liquidity purposes.

Current acting director Ed DeMarco of the FHFA announced that the agency has taken a major step in building a single-securitization platform, including the creation of a new business entity between the GSEs. 

"Our objective, as we stated last year, is for the platform to be able to function like a market utility, as opposed to rebuilding the proprietary infrastructures of Fannie Mae and Freddie Mac," DeMarco said.