A Private Alternative to Fannie Mae and Freddie Mac
March 11, 2011
There is nothing unique, per se, about Fannie Mae and Freddie Mac that the private sector could not provide. Both Fannie/Freddie and the private sector have loan-underwriting models; both can purchase loans and create mortgage-backed securities (MBS); both the private and public sector can offer mortgage insurance. But the one thing that Fannie and Freddie have that the private sector does not is an explicit guarantee from the federal government, say Anthony B. Sanders, a professor at George Mason University, and Michael Lea, the Director of The Corky McMillin Center for Real Estate at San Diego State University.
- If the private sector can replicate Fannie and Freddie's only defining "virtue" -- a federal-government guarantee -- then there is no justification for keeping Fannie and Freddie around either in conservatorship or in their preconservatorship forms.
- Fannie and Freddie will not be missed nor will their absence make a difference to the housing market or the economy.
Fannie Mae and Freddie Mac should be phased out over a five-year period. Covered bonds (like in Denmark and Germany) and an improved private label MBS market are needed to take their places, along with increase lender portfolio lending. Without Fannie and Freddie, it is reasonable to expect a small drop in homeownership rates as well as a small increase in mortgage interest rates (100 basis points in the short run, less in the long run). In other words, not much will change in a world without Fannie Mae and Freddie Mac, other than saving taxpayers hundreds of billions of dollars in the future, say Sanders and Lea.
Source: Anthony B. Sanders and Michael Lea, "The Future of Fannie Mae and Freddie Mac," Mercatus Center, March 2011.
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