The role of government in housing finance should be reduced dramatically from its current level, American Bankers Association President and CEO Frank Keating said in a letter sent to federal officials earlier this month.

The letter focused on the future of what are called government-sponsored enterprises, such as Fannie Mae and Freddie Mac. GSEs are financial-services corporations created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors.

Keating's letter detailed a path that the ABA believes can be followed to reduce and transform the housing finance role currently provided by such enterprises, or GSEs. Rather than develop a "silver bullet" solution to housing finance, ABA suggested that policy makers create a well-regulated covered bond market, as well as enhance the Federal Home Loan Banks to better help them meet their mission of providing advances to private market portfolio lenders with minimal taxpayer exposure.

"A well-regulated private market should be the desired financing source for the bulk of borrowers whose income and credit rating qualify them for conventional financing," Keating said in the letter.

ABA recommends an increase in guarantee fees, or G fees, as the primary mechanism for reducing government involvement, as well as for compensating the government for its ongoing support.

"By dialing up the G fees in an orderly and well-detailed manner, eventually the private market will find itself in a position where it is better able to compete with the GSEs for business," Keating said.

The other mechanism for transition to a private market will be the creation of more reasonable loan limits for GSE purchases, the ABA said.

"While some high-cost areas persist and a recovery of the housing market will entail a hoped-for stabilization and recovery in home values, the conforming loan limits for most of the nation can be reduced," Keating said.

The ABA said it believes any GSE successor must contribute necessary market stability and liquidity and have adequate capital. In addition, the new book of G-fee business should provide healthy returns that support government payments and absorb some of the potential bad asset losses, the organization said. The resulting guarantee business should be managed and regulated to dramatically shrink its market share, and also to establish incentives for growth of purely private mortgage finance alternatives to fill that market share, it said.

"The end goal we envision is a housing-finance market in which more than half of mortgage finance occurs without federal secondary market guarantees of any type," Keating said. "That vision may take years to attain. However, it is essential that we start taking incremental steps toward these goals, and trust in our ability