While it’s important to move the mortgage finance space away from Fannie Mae and Freddie Mac’s current dominance in the segment, mortgage finance professionals warned Senate Banking Committee members that a robust re-haul or elimination of the government-sponsored enterprises could increase the cost of borrowing and threaten the ongoing existence of some fixed-rate mortgage rates. “The vast liquidity and forward-trading nature of the TBA market provides key benefits to consumers, such as the broad availability of 30-year, fixed-rate mortgages that may be prepaid without penalty, and significant and consistent liquidity in the secondary mortgage market,” said Thomas Hamilton, managing director of Barclays Capital. He made those statements while speaking at a Senate Banking hearing titled, “Examining the Housing Finance System: The To-Be-Announced Market.” The Senate Banking Committee also heard from Andrew Davidson, president of Andrew Davidson & Co. Inc., who advised a better strategy for reforming the financial system would be to make a series of safe, transformational changes to the current structure of the GSEs rather than killing them off altogether. “Given the weak state of the housing market and the economy, completely eliminating the GSEs or completely replacing them with an alternative structure would likely be severely disruptive,” he told the committee. “Gradual transformation of the GSEs would also allow the private MBS market and other alternatives to develop.” Davidson said one way to reform the GSEs would be to “increase the amount of private capital ahead of the GSE guarantee.” He explained that this would decrease taxpayer risk. Even still, he said “it will probably be better not to reconstitute the GSEs as shareholder-owned companies which can deliver a federal guarantee. Thus capital would need to be provided in a different form.” Davidson’s second approach, which he calls “even better,” would require the “GSEs to utilize a senior subordinated structure to attract capital that would stand in the first-lost position, either side by side with the GSEs or ahead of the GSEs for some of their MBS issuance.” He sees this strategy as multilayered since it reduces risk to taxpayers and helps the GSEs and regulators determine the cost and availability of private capital. Write to Kerri Panchuk.