The US Government should split up ailing housing-finance giants Fannie Mae's and Freddie Mac and turn over their work to several lender-financed Mortgage Securities Insurance Companies set up by groups of banks - while still guaranteeing home-loan bonds, says Michael Heid, boss of Wells Fargo's giant home mortgage loan arm and a spokesman for the 30-bank Financial Services Roundtable, in testimony before the US House banking committee. More testimony here.

The housing industry needs "a government backstop" to keep money flowing, Heid said. But it should be privately-run: Four to eight "MSICs" - enough to compete, but not to confuse - would buy loans from lenders, and charge lenders fees to provide government insurance on mortgage bonds sold to investors to raise more cash for new loans.

There would still be a "federal guarantee" on those mortgage bonds. But "standing before the federal guarantee would be: the down payment on a mortgage made by the homebuyer; any private mortgage insurance (bought by the homebuyer); the shareholder's equity" in the MSIC; and the insurance reserve," all of which would have to go broke before taxpayers went on the hook, Heid told Congress.

"The system we propose would operate much like the Federal Deposit Insurance Fund does today," he added. Except, of course, that FDIC is a government agency, with its own staff of bank examiners who hold life-and-death power over errant lenders. Instead, Heid wants to set up a new "World Class Regulator" to oversee the privately-run MSICs, set tough loan and bond standards, refuse bad loans, and make sure MSICs don't speculate on their own securities, like Fannie and Freddie did, to taxpayers' loss.

MSICs would also set aside 0.0004 (four-one-hundredths of one percent) of the value of the mortgages they buy for very-low-income home and rental projects.

If the MSICs charge enough, but not too much, for mortgage-bond insurance, "the federal guarantee would be budget-neutral" to taxpayers, Heid concluded.