As is its mission, GAO doesn't recommend one path over another--the agency did make clear, however, the pros and cons of each possibility.

The options are:

• Reconstitute the enterprises as for-profit corporations with government sponsorship but place additional restrictions on them. This option would also add controls to minimize risk, such as eliminating or reducing mortgage portfolios, establishing executive compensation limits, or converting the GSEs from shareholder-owned corporations to associations owned by lenders;
• Establish the enterprises as government corporations or agencies. Under this option, the GSEs would focus on purchasing qualifying mortgages and issuing MBS, but eliminate their mortgage portfolios. The Federal Housing Administration could assume additional responsibilities for promoting homeownership for targeted groups;
• Privatize or terminate them. This option would abolish the enterprises in their current form, dispersing mortgage lending and risk management throughout the private sector;

Reconstituted as GSEs, Fannie and Freddie would inject liquidity into the markets during normal economic times, GAO concluded. "However, as for-profit entities, their capacity to support housing finance during stressful economic periods is open to question."

As a government entity, with access to Treasury-issued debt, Fannie and Freddie may be positioned to provide mortgage liquidity during normal and stressful economic periods, GAO went on to surmise. "But, without a portfolio to hold mortgages, its capacity to do the latter also may be limited. Treasury or the Federal Reserve may need to step in and purchase mortgage assets under such circumstances."

If the agencies are privatized, liquid mortgage markets could be re-established in normal economic times. But, GAO noted, private mortgage lending has collapsed in the current recession. "A federal mortgage insurer could help ensure that private lenders provide mortgage funding in stressful economic periods."