The MBA wants to split up Fannie Mae and Freddie Mac. Perhaps it’s time.

The catalyst for such doom talk comes in the form of recommendations from the Mortgage Bankers Association. The MBA has proposed that the two behemoths be split into three smaller, private companies, called Mortgage Credit-Guarantor Entities (MCGEs). Like Fannie and Freddie these new entities would enjoy some government backstopping, but would ultimately own the loans underlying the government-guaranteed securities they issue. Should there be a foreclosure the MCGEs would own the real estate collateral. Specifically the MBA seeks to create a new type of mortgage backed security that works in two parts. In the first part the MCGEs would provide loan-level guarantees. In the second part the government would issue an explicit guarantee based on the credit risk in these securities.

So, yes, the government is still involved in the business of backing loans, but on the face of it these new MCGEs would privatize some of the risk. Today, with Fannie and Freddie in conservatorship all the risk, implicit and explicit, is assumed by the government.

The MBA speaks of a strong regulator to rule over these new entities, one funded through the government-guaranteed insurance premiums. But even remedial students of Fannie and Freddie know that they too have their own regulator, the Office of Federal Housing Enterprise Oversight, which was shown to be ineffectual at keeping the firms on the straight and narrow. Also it should be noted that the MBA is not making this proposal simply to be nice. It is trying to kick-start the secondary mortgage market. “It’s now been more than two years since the secondary mortgage market collapsed,” Michael Berman, MBA’s vice-chairman said in a public statement. “Rebuilding the secondary market is critical to restoring liquidity and confidence. The government has an important, limited role to play to ensure a stable flow of funds for mortgages.”

Although this last point will surely be debated, it is indisputable that the government’s rescue of Fannie and Freddie ensured a stable flow of funds to the two firm’s shareholders in 2009. Though shares collapsed on late 2008 those who bought at the start of the new year have profited handsomely, as Fannie is up 90.8% and Freddie is up 141.1%. Even so, Fannie Mae ( FNM - news - people ) was down 7.6% Wednesday, and Freddie Mac ( FRE - news - people ) is down 10.5%, meaning that the MBA’s proposal is scaring away some thrill seekers.

Shareholder volatility is just one problem plaguing Fannie and Freddie. Hilary Kramer, chief investment officer of A&G Capital Research, consulted with the firms from 2004 through 2006, and says that the firms owe the U.S. government $100 billion, and pay the government massive dividends each year.

“Fannie and Freddie’s value is zero because (they) could never produce enough profit to pay back that $100 billion,” she says. As a result she says the two firms really are functioning as bubbles, with investors in a frenzy to get in. As a result of this frenzy trading volume is skyrocketing, with over 1 billion shares trading hands on August 24.

Who really benefits from this frenzy? The same people who always seem to win on Wall Street, the banks and brokerages. On just that one day they generated over $30 million in trading fees, just for processing the trades related to Fannie and Freddie. So Goldman Sachs ( GS - news - people ), JPMorgan Chase ( JPM - news - people ) and Citigroup ( C - news - people ) continue to find new and interesting ways to make money from the bailouts.

Kramer adds that Fannie and Freddie would be in even more dire straits were it not for the actions of the Federal Reserve. Even as 421 troubled banks are on the verge of failing the Fed continues to prop up these firms. “The Fed is stepping in and buying, buying, buying and supporting the mortgage-backed market,” she says. “The government has spent over $200 billion just in … trying to keep mortgage rates at a 5% level or less.”

Worse, she says, there’s no sense of this reality in the executive suite. The suits continue to collect their bonuses, even as 1.8 million homes are at risk of foreclosure. Still, she says Fannie and Freddie only got in this position at the behest of the policy wielders in Washington and Wall Street firms looking to securitize everything they could get their hands on.

One thing that doomed Fannie and Freddie was faulty projections into how the housing market would continually work. Their models were based on assumptions that home prices would grow 5% a year based on immigration. But now that the U.S. economy has tanked immigration has started to work the other way. Kramer attests that some white collar execs she knows are fleeing the U.S. because their home nations offer better health care, whereas in the U.S. if you lose your job it gets very expensive, very fast.

Brett Hammond, chief investment strategist at TIAA-CREF, agrees that despite Fannie and Freddie’s sad state of affairs, this tragedy isn’t really of their own making. “It isn’t Fannie and Freddie’s fault, it’s that they’re subject to public policy. And the public policy was, for decades, to get more people into housing and not think ‘what kind of flexibility do we need?’”

Marc Lowlicht, the head of the wealth management division at Further Lane Asset Management, puts it this way: “I’m going to give you one sentence: politicians shouldn’t go into economics.”

While that might sound pithy it’s already too late for that with Fannie and Freddie. And if this latest MBA proposal gathers momentum it might be a good idea to think twice before trying to ride this bubble.