Critics who bash the Treasury Department for proposing mortgage market reforms that will increase the cost of homeownership are right on the money, a new research report says. A study from mortgage backed securities specialist firm, Smith Breeden Associates, says all three of the Treasury's proposed reforms will raise lending prices across the nation. At the same time, Smith Breeden said price hikes of some sort are inevitable as the market tries to strike a balance between the two ends of the spectrum: a private lending model that reduces taxpayer risk while hiking prices; and a more public model that lowers prices while increasing taxpayer risk. With this in mind, Smith Breeden is recommending the third option under the Treasury's reform plan since it fluctuates between the two extremes by leaning heavily on private lending, while allowing the government to serve as emergency reinsurer for private firms that will continue to carry most of the risk on loans in their portfolios. A plan that keeps some government backing in times of crisis is preferred by Smith Breeden. The firm says a complete exodus to the private sector would alert investors, many of whom rely on government reinsurance as a barometer of a loan's worth and safety. At the same time, the research firm said greater private sector involvement and a winding down of the Fannie Mae and Freddie Mac is needed to reduce taxpayer risk. Smith Breeden says the first option outlined by the Treasury will financially hurt borrowers the most, since it recommends privatization of the mortgage market, with an extremely limited backup plan. With no emergency reinsurance plan for the market, it would have the effect of raising prices as investors weigh their risks more heavily. Under the plan, only a limited group of borrowers would have some backing through the Federal Housing Administration. Still, the first option is the best bet for taxpayers who don't want to pay hefty reinsurance fees when organizations hit a rough patch on their loans, according to Smith Breeden. Analysts at the firm said the Treasury's second option would limit FHA reinsurance to a small groups of borrowers, while also offering guarantees during times of market crisis. The third option, on the other hand, would scale back government involvement but still provide catastrophic reinsurance to serve as an excess insurer behind private capital. This plan is preferred by Smith Breeden because the government would only step in after private backers are completely tapped out. That formula would limit taxpayer risk, while ensuring enough safeguards to keep borrowing costs lower for homebuyers, the report concluded. Write to Kerri Panchuk.