NCPA - National Center for Policy Analysis

United States Should Aim for Robust Private Mortgage Market

February 25, 2011

Government-sponsored enterprise (GSE) charters meant that Fannie Mae and Freddie Mac were private corporations with an implicit, but real, taxpayer guaranty.  No private entity can compete with the government-granted advantages of the GSEs.  We should aim in the long term for a housing finance sector that is principally a robust private market, and one in which you can be either a private company or you can be a government agency, but you cannot be both, says Alex J. Pollock, a resident fellow at the American Enterprise Institute.

  • Fannie and Freddie need to be divided into a "bad bank," a "good bank" and a government agency.
  • The bad bank should be put into a liquidating trust, the good bank should be privatized, and the governmental activities of delivering subsidies and nonmarket loans should be merged into the structure of the Department of Housing and Urban Development.

Such a restructuring would certainly be complex, and while we are still mired in the aftermath of the bubble which Fannie and Freddie did so much to help inflate, probably cannot be done yet.  But there are a number of focused, specific actions we could take now, consistent with our long-term aim.  Pollock suggests:

  • Enable covered bonds as an alternate long-term mortgage funding option.
  • GSEs should have limited life charters, so Congress must periodically reexamine their structure, privileges, risks and usefulness.
  • Bring GSE capital requirements up to those of national banks.
  • Set a regular, predictable reduction in GSE conforming loan limits.
  • Mandate clear federal budget accounting for Fannie and Freddie.

Source: Alex J. Pollock, "A Dozen Ideas: What to Do about Fannie and Freddie," American Enterprise Institute, February 21, 2011.

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