The Obama administration will announce its solutions to phase out Fannie Mae and Freddie Mac as soon as Friday. The administration will gradually reduce its support of the mortgage market more than two years after the US government seized the two housing-finance giants, Chinese Business News reported Friday.

Analysts said China's holdings of the two giants' bonds will not erode in the post-Fannie and Freddie world as the US government will offer unlimited warrants to protect the interests of debt holders, the report said.

Three solutions

The Obama administration will release a report including three solutions to deal with Fannie and Freddie and the nation's $11 trillion housing market.

According to an Associated Press (AP) report, one of the options is to eliminate government participation in the housing mortgage market except for existing agencies like the Federal Housing Administration (FHA).

Another plan would allow the US government a role that explicitly guarantees mortgages only when the market is in trouble. The final proposal would always allow the government to play a role in housing mortgages, though not through government-controlled companies like Fannie and Freddie, AP said.

The report said Republicans and Democrats will compare the advantages and disadvantages of all solutions and find a way to fix the nation's mortgage market. The change will be gradual, and there is no hurry to find a quick fix.

China's holdings

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China is the biggest debt holder of Fannie and Freddie with - according to Standard and Pool's estimation- approximately $340 billion worth of bonds as of June 2010. Some analysts worried that the sell-off of the two housing-finance giants would bring huge losses.

However, Liu Yuanchun, deputy head of the School of Economics of Renmin University of China, said the change will be gradual and slow. He predicted the new policy to phase out Fannie and Freddie would not devastate the market, the Chinese-language newspaper Beijing News reported.

After Fannie and Freddie delisted from the New York Stock Exchange last year, China's State Administration of Foreign Exchange (SAFE) said China's foreign reserves did not invest in the stocks of the two firms. SAFE said the repayment of capital and interests of the bonds stayed normal.

Some financial organizations in China also purchased their debts, and according to the 2010 interim report of Bank of China, the debt service of the two giants stayed normal, the Beijing-based Economic Information Daily reported.

Lu Zhengwei, chief economist of Industrial Bank, said in a report released on Thursday that attention should be paid to the safety of the Fannie and Freddie bonds. He explained that under US legal framework, government-sponsored organizations like Fannie and Freddie are still private companies and will not have government credit, NBS reported.

However, SAFE recently said China will still adhere to the investment strategy of holding diversified foreign reserves to disperse risks and maintain safety, liquidity and value of foreign reserves, the Economic Information Daily reported.