Mortgage rates remained unchanged Wednesday in a third consecutive day of quiet trading. In economic news, the Mortgage Bankers Association weekly purchase activity index rose by 0.7%, while the refinancing activity index fell by 0.1%. Average reported conventional 30-year fixed rates increased to 4.61%, not including fees. Yesterday, President Obama urged lawmakers to wind down mortgage giants Fannie Mae and Freddie Mac over the next several years. The President’s plan is similar to a bi-partisan proposal in the Senate, whereby the government would continue to provide a limited guarantee to investors in mortgage-backed securities. Meanwhile, House Republicans propose eliminating Fannie and Freddie and limiting the Federal Housing Administration (FHA) to insuring only first-time and lower-income buyers. We are concerned that both approaches will increase mortgage interest rates and reduce competition and the availability of credit. After being placed into conservatorship by the government, Fannie and Freddie received $187 billion in bailout funds, but have since repaid $132 billion and are continuing to pay huge quarterly dividends to the Treasury. All of the bailout funds received should be returned to the government by the end of next year. We believe the two agencies should be merged to increase efficiency and be limited to purchasing only high-quality “Qualified Mortgages” that require full documentation, limited debt-to-income ratios, and have sensible minimum down payment requirements. Done properly, the merged entity could be highly profitable, continue to provide a stable source of liquidity to the market, and minimize risk to tax payers.