NCPA - National Center for Policy Analysis

Taxpayers Pay For Fannie Mae And Freddie Mac

November 8, 2000

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) were originally founded as a way for mortgages to be shifted from small banks and thrifts to the capital markets -- reducing the risks borne by lenders and giving them the liquidity to lend again.

As quasi-public institutions, they were accorded certain rights and privileges not available to private mortgage lenders -- exemption from state and local taxes being a particularly valuable one.

  • But earlier this year a congressional committee took aim at this preferential treatment and it appeared that reform might be in the wind.
  • Federal Reserve chairman Alan Greenspan wrote that "subsidies accorded ...are, of necessity, at the expense of other federal or private-sector initiatives and hence are ultimately financed by householders, either through taxes or through the reduced accumulation of wealth."
  • Then toward the end of October, a complicated and relatively empty six-point agreement between the agencies and the committee was reached -- emphasizing disclosure but making no fundamental difference to their privileged status.
  • Although the agencies' securities are not government guaranteed, financial markets treat them as though they were -- no doubt under the assumption that the federal government would not hesitate to use taxpayers' money to rescue them if they threatened to go bust.

Out from under the threat of having their privileges removed by Congress, both institutions have seen their publicly-traded shares climb by about 50 percent in the past two months.

Source: "Capital Winners," Economist, November 4, 2000.


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