One role Fan and Fred have provided - indeed, the original reason for their existence - was to act as the buyer of last resort for mortgages when banks and private investors retreat, herdlike, from the market, which happens with some regularity. In the future, that role could be filled by the Federal Home Loan Banks and the Federal Reserve, as it was during the most recent crisis.
Fan and Fred, alas, weren't just buyers of last resort - they also bought aggressively when everyone else was buying, because it was an easy way to increase profits. In the future, their portfolio of mortgages and mortgage-backed securities will be gradually sold off, allowing the Treasury to recoup some, or perhaps all, of the cost of the government's rescue.
That still leaves the question of who will be in the business of packaging and securitizing mortgages. Most of the proposals envision a limited number of private, federally regulated firms that would be required to hold significant amounts of capital to cover losses from loan defaults that might result from a routine downturn in the economy or housing market. The big debate is over the extent of any government guarantees, or reinsurance, of extraordinary losses if and when the capital of the issuing firms is depleted.
Two other issues, however, are of vital interest for the Washington economy.
One is whether Fan and Fred will be liquidated, their valuable software and databases and customer relationships sold to Wall Street vultures, or whether the existing enterprises will be able to raise new capital, find new names and emerge as two of the chartered players in the new secondary market.
The other question is whether the big banks that already have big businesses originating mortgages will also be allowed to vie for one of the securitization charters.
If they are, it's a sure bet that the big banks will cleverly use their presence in both markets to gradually drive out competitors in both the secondary market - including Fan and Fred - as well as in the loan origination business, which is of particular concern to regional and community banks.
In Congress, two Republican House members from Virginia will be key players in this fight: Majority Leader Eric Cantor and Robert Hurt, vice chairman of the subcommittee with jurisdiction over Fan and Fred. Virginians might want to ask them why they want to rob their state of jobs and hundreds of millions of dollars in annual tax revenue and ship them up to Wall Street.
In the meantime, the Washington business community might want to rally behind other ideas for restructuring the mortgage finance market, lest Republicans succeed in unnecessarily destroying two of the region's most valuable enterprises.