NCPA - National Center for Policy Analysis


May 25, 2004

Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that purchase bundled mortgages from primary lenders, have encountered great difficulties over the last year. Complete privatization might be an attractive option, says Peter J. Wallison of the American Enterprise Institute.

Since last fall, the nation's largest sources of financing for home mortgages have had to deal with a barrage of bad news. For instance, the Office of Management and Budget found Fannie and Freddie to be undercapitalized, in need of serious new regulation, and failing their mission to provide affordable housing. In addition:

  • The Department of Housing and Urban Development (HUD) requested authorization to levy $6.5 million in fees on Fannie and Freddie so it could better enforce its affordable housing regulations.
  • The Federal Reserve Board repealed special lending arrangements with the GSEs that some have calculated to be worth about $10 million a year.
  • The Fed estimates between 42 and 81 percent of Fannie Mae and Freddie Mac's market value is attributable to government subsidies, yet the benefit homebuyers derived from this was only 7 basis points (seven-one hundredths of 1 percent).

Finally, despite being consistently and highly profitable, the valuation of Fannie Mac shares has remained fairly flat. Investors have built into Fannie's stock price an enormous risk premium, says Wallison.

A looming Senate bill would further regulate the GSEs. Fed chairman Alan Greenspan has called for privatization, and with all these negative developments, the option of privatizing is increasingly attractive, says Wallison.

Source: Peter J. Wallison, "The Case for Privatizing Fannie Mae and Freddie Mac Grows Stronger," American Enterprise Institute, May 2004.

For AEI text


Browse more articles on Government Issues