I was fortunate to have lunch the other day with Chris Whalen of Institutional Risk Analytics, and as usual Chris exhibited why he is one of the brightest guys around on banking.

We talked about many different topics, and one of the more interesting points he made was on Fannie Mae and Freddie Mac. Peter Eavis’s commentary on Monday in the WSJ highlighted the ongoing debate about what to do with the two-headed GSE serpents. Essentially, Eavis presented three ideas: 1) that Fannie and Freddie stop holding mortgages, yet return to private ownership as well as offer some sort of mortgage guarantee; 2) morph into FHAs that guarantee mortgages within the confines of the federal government; or 3) that Fannie and Freddie simply cease to exist, with the private sector filling the void.

Chris’s point was elegantly simple: let ’em continue to be just conduits. Sure, the government has to first shed the hedge fund-like assets the GSEs still have, but once that is completed, Chris suggested that the back offices of Fannie and Freddie be combined to seize on operational efficiencies (he called it “Frannie”) and then simply act as a conduit to the mortgage industry with low, double-digit marketshare and in competition with private conduits. I suggested that this conduit could be combined with FHA and/or Ginnie Mae, potentially wringing out even more efficiencies; he concurred with that, but said setting clear federal standards for securitization is still needed to fix the private market. Till then, Frannie is a monopoly.

It’s a simple course of action for troublesome assets that continue to require federal funds to keep them afloat. At last count, Fannie and Freddie have sucked up at least $85 billion of taxpayer dollars. What’s the point? It is highly doubtful that their diminished role will dramatically undermine homeownership in the US. Yet, I tend to agree that the mortgage market will continue to need a reliable conduit — without the investment appetites the GSEs eventually exhibited. The sooner the economics professors posing as federal banking policy officials in the Obama administration realize that, the better off we’ll all be.