In the wake of last week’s Conference on the Future of Housing Finance, analysts at the Federal Reserve Bank of New York are suggesting a “lender cooperative” model for replacing the role of Fannie Mae and Freddie Mac in the mortgage industry. Any revamp of the GSEs should “promote the availability and stability of mortgage finance for the core of the housing market while minimizing systemic risk and costs to taxpayers,” the analysts said in a recently published staff report. “Any new structure should be designed to be resilient over the business cycle so that mortgage financing neither dries up during periods of market stress nor expands excessively during periods of market ebullience,” the analysts said. Still, another analyst at Barclays Capital doesn’t foresee the Fed taking action until the economy worsens and believes the collateral for mortgage-backed securities could suffer “if the Fed announces a new large-scale Treasury purchase program, or even if it goes for a more surgical approach aimed at boosting refinancing,” wrote Ajay Rajadhyaksha in his weekly note on securitized products from Barclays Capital. “We believe that the economy would have to worsen significantly even from current levels before the Fed will act, and there would be plenty of indicators along the way, in the form of weakening data,” Rajadhyaksha said. “MBS longs can and should use any such indicators to scale back. But for now, considering how much the basis has cheapened, we remain overweight.” The NY Fed analysts believe the following six principles lay the groundwork for any GSE reorganization:

• maintaining the standardization of mortgage underwriting and the “to-be-announced” market, both of which provide necessary liquidity to the market
• separating the support mechanisms for single-family and multi-family lending
• increased transparency of and accounting for government-housing subsidies
• establishing a liquidity provider or even a buyer of last resort for mortgage securities
• have the government either provide insurance for housing credit or make the insurance explicit and fairly priced to eliminate any long-run cost to the government
• decide whether the 30-year fixed-rate amortizing mortgage with no prepayment penalties remains a key mortgage product

The staffers said membership in a cooperative should include large and small lenders, as well as banks and nonbanks, with a governing board made of members and independent directors. Only members would be eligible to sell mortgages to the securitization cooperative and each member would hold an equity stake by providing seed capital. The capital structure under this plan would include ownership shares paid in equity and a mutualized loss pool with contributions to the pool based on the volume of mortgages securitized. The NY Fed analysts said the loss pool “would, over time, build up to provide the bulk of the capital base and serve as a reserve against credit-related mortgage losses.” The analysts also said the cooperative should seek to protect smaller institutions and give them equal access to its services because the majority — more than 60% — of GSE origination is performed by only four banks: Bank of America (BAC), Wells Fargo (WFC). Citigroup (C), and JPMorgan Chase (JPM). Here are two authors of the NY Fed report discussing the pros and cons of a cooperative model. Write to Jason Philyaw. The author holds no relevant investments.