NCPA - National Center for Policy Analysis

Goodbye Fannie Mae and Freddie Mac

August 20, 2002

The United States grants Fannie Mae and Freddie Mac subsidies to help them boost homeownership by lowering mortgage rates. The subsidy costs about $8.3 billion a year. However, a recent study by the Federal Reserve Bank of Minneapolis finds that the organizations are inefficient and ineffective.

The Fed Bank study shows that interest-rate reduction is negligible and has a minimal impact on helping renters buy a home.

  • Fannie and Freddie are credited with reducing standard mortgage rates by an average of 0.2 to 0.5 percentage points.
  • But mortgage rates would have to fall 2 percentage points to produce a meaningful change in the percentage of households that can afford to buy a home.
  • Even its effect would be limited -- a 2 percentage-point drop would increase the percentage of all renters that could buy a house by only 0.5 percentage points.

The Fed Bank study recommends that the $8.3 billion subsidy be converted into a federal program that provides direct cash payments to first-time homebuyers. That money could provide grants of $10,000 to some 830,000 first-time homeowners. By lowering the down-payment amount, it will better spur homeownership. The study finds:

  • A $5,000 payment increases the percentage of renters who can afford a home by 11 percent for all renters.
  • A cash payment of $10,000 has nearly twice the effect.
  • In contrast, Fannie Mae and Freddie Mac's no-down-payment standard increases the percentage of renters who can become homeowners by only 2.5 percentage points.

However, Freddie Mac retorts that direct assistance programs have not had a terribly successful history.

Source: Dawn Kopecki, "Cash Payments to Home Buyers Are Called Effective in Fed Study," Dow Jones Newswires, August 13, 2002.

For study text

http://www.minneapolisfed.org/pubs/region/02-04/2001ar.pdf

 

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