March 1, 2011

The Future of Fannie Mae and Freddie Mac

Key materials
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Can the private sector offer a less costly alternative to Fannie and Freddie that requires far less government involvement in the housing and mortgage market? This paper argues that it can. There is nothing, per se, unique about Fannie/Freddie 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.

The one thing that Fannie and Freddie have that the private sector does not is an explicit guarantee from the federal government. 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 pre-conservatorship forms.