A Republican-backed plan to wind down the operations of Fannie Mae and Freddie Mac over the course of the next four years may be too ambitious, with a true transition expected to take up to six years, according to researchers Chris Flanagan and Jimmy Nguyen, who published their findings in the latest Bank of America Merrill Lynch Securitization Weekly Overview.

The report comes a week after the Obama administration missed its Jan. 31 deadline for filing recommendations with lawmakers on how to reform the government-sponsored enterprises. The U.S. Treasury is expected to release its own report on how to reform the GSEs this week.

Still, Flanagan and Nguyen see the GSE-reform issue playing a significant role in the 2012 election cycle as lawmakers and politicos fight for political capital over the issue. "In our view, since it would introduce enormous instability into an economy that is struggling to recover, the Republican plan contains a number of nonstarters, such as: winding down the operations of (Fannie Mae and Freddie Mac) over four years; reducing the portfolio holdings by 25% over four years; and moving (Fannie/Freddie) onto the federal budget, and subjecting their debt to the national debt limit," the researchers wrote. Rather than GSE reform taking four years, the report says under the best circumstances it will take at least five to six years to overhaul and transition Fannie and Freddie. In the meantime, GSE reform continues to get play on Capitol Hill, with politicians eyeing Fannie and Freddie critically in the aftermath of a two-year economic lull in which taxpayers grew suspicious of the mortgage giants. The researchers point to Rep. Spencer Bachus (R-Ala.) who serves as chairman of the House Committee on Financial Services. The congressman recently distributed a press release saying the Obama administration and Treasury are guilty of "throwing more taxpayer dollars down the Fannie and Freddie rathole." Looking ahead, the researchers say policy makers — two years after the financial meltdown — have access to better information about what safety measures worked in stimulating the economy. "The list of TARP recipients who have returned principal, along with interest and dividends, and restructured, has grown," the researchers noted.  The pair says TARP's direct financial cost to the taxpayer has even fallen from 2009 estimates of $341 billion to November estimates of $25 billion.

"Along with that, the economy and markets have recovered from the brink," Nguyen and Flanagan added. "In many instances, the recovery has been sharp. From a 'bookend' perspective, the time for restructuring of the GSEs, as a precursor to exiting conservatorship, is, at a minimum, growing closer. We, therefore, think the market has legitimate reasons to assign a nonzero and increasing probability that something bold may eventually materialize. However, as much as the logic may be compelling, we see no reason to believe that delivering on this boldness is particularly likely in the very near term," they wrote.

The pair says the next step is for the Treasury to cut the dividend on its GSE preferred equity from 10% to 5%. "This would make the dividends more consistent with the bank treatment under TARP, hasten the return of the GSEs to profitability, and thereby get the taxpayer off the hook," they stated. While the report credits TARP — or the Troubled Asset Relief Program — for restoring the health of the larger economy, the Treasury's Home Affordable Modification Program, which was designed to stave off foreclosures, is noted for "falling dramatically short of  any meaningful standard of success." Under the program, 522,000 home loans were permanently modified, with 238,000 funded by TARP and the remainder financed by the GSEs, the report claims. "The upshot of these highlights is that TARP has been very successful at restoring the health of larger-scale financial and other institutions but has not had the same success in addressing household sector issues," the researchers concluded. Write to Kerri Panchuk.