NCPA - National Center for Policy Analysis

Housing Market without Fannie Mae and Freddie Mac

January 23, 2013

As Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac are special quasi-governmental institutions in the mortgage market that cost the government and taxpayers billions of dollars when the housing bubble burst. Eliminating these institutions would have a minimal long-run impact on the economy, say John Ligon and William Beach of the Heritage Foundation.

  • Fannie and Freddie are dominant lenders in the mortgage market.
  • By 2010, they guaranteed about 50 percent of all mortgages in the United States, which included a substantial share of subprime loans.
  • At the height of the subprime mortgage crisis in 2008, Fannie and Freddie entered the conservatorship of the Federal Housing Finance Agency to ensure the GSEs could cover their debt, which cost taxpayers $180 billion dollars through March of 2011.

Ending new Fannie and Freddie activity in the housing market would have minimal effects on the economy as the whole. Gross domestic product (GDP) would fall an estimated 0.0037 percent, while employment would decrease an estimated 14,000 jobs or 0.01 percent.

  • In addition to the miniscule effects on GDP and employment, wages would rise over the forecasted 10 year period.
  • The costs of mortgage borrowing would rise, as would credit conditions, which would cause the rate of homeownership to decline to more responsible rates.
  • A macroeconomic simulation estimates that eliminating the housing GSEs would drive the baseline levels of real GDP down by $6 billion per year over the 10 year period.

Winding down these lenders would allow mortgage markets to stabilize and return to a state of free competition, though those with lower income would be disproportionately affected.  From a macroeconomic standpoint, fading Fannie and Freddie out of the mortgage market would lead to improved household balance sheets, rises in real disposable income personal income, greater private savings and reduced overall debt levels.

With less financial leverage, borrowers would make better decisions about what they can realistically afford. When coupled with increased capital requirements and higher standards, fluctuations in housing prices would not trigger the financial contagion that devastated America in 2008.

Source: John Ligon and William Beach, "Housing Market Without Fannie Mae and Freddie Mac: Economic Effects of Eliminating Government-Sponsored Enterprises in Housing," Heritage Foundation, January 8, 2013.


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