"Some advocate for the wind down of the guarantee businesses of Fannie and Freddie, either by stepping down loan limits or restricting their underwriting authority in some formulaic way. The theory is that private investors will fill the void in the market created by the enterprises’ forced withdrawal and that the transition will be seamless."
"My question to the advocates of this approach is: what if it isn’t seamless and substantial demand for mortgage credit goes unmet? If policymakers get the size or pace of a forced wind down wrong, we will suffer a credit contraction, house prices will fall and the U.S. economy will once again be at risk for a recession. When I ask the proponents of wind down “what then?”, the answer is that the FHFA will wind the enterprises back up. This is precisely the kind of start/stop government policymaking that prevents private investors from taking risk. Until Congress provides private investors with a credible transition plan from the government- dominated market that exists today to one with a better balance of private risk and public support, I predict that private risk taking in the mortgage markets will remain muted."
Statement by James E. Millstein former Chief Restructuring Officer of the United States Department of the Treasury before the Committee on Financial Services U.S. House of Representatives April 24, 2013