NCPA - National Center for Policy Analysis

What Justification For Fannie And Freddie?

December 9, 1999

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are strange entities and unnecessary in today's financial world, critics say. They are neither completely public, nor completely private. Technically, they are classified as private companies, complete with shareholders and annual profits; but they are subsidized by taxpayer and protected by the federal government from competition.

What they do is bundle and resell securitized mortgages to investors. There are dozens of private companies that would gladly perform the same functions if Fannie Mae and Freddie Mac were not government-protected and subsidized, analysts report.

Critics are charging the two with lining the pockets of the rich at the expense of the poor. Specifically:

  • They are subsidized to the tune of $6 billion to $7 billion a year -- one third of that benefiting shareholders, according to studies by the Congressional Budget Office and the Treasury Department.
  • Although they are government-created monopolies with access to below-market financing, top executives at both institutions draw down multi-million-dollar salaries.
  • Since homeowners are wealthier than the population as a whole, low-income renters are underwriting the housing costs of their more affluent neighbors.
  • A 1997 Cato Institute study found that private banks were almost twice as likely to provide services to those with lower incomes compared to entities like Freddie and Fannie.

If the mortgage market is to be opened up to real competition, analysts say, these two outfits should be denied special lines of credit from the Treasury, loopholes enabling them to avoid Securities and Exchange Commission oversight, and special exemption from state and local income tax. Moreover, they should receive no implicit official backing of their securities -- which, by the way, are classified by law as government securities.

Source: Daniel Mitchell (Heritage Foundation), "Take Freddie and Fannie Off the Dole," Washington Times, December 9, 1999.


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