News Release

October 4, 2004

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Protect taxpayers, privatize Fannie and Freddie

WASHINGTON--A new Cato Institute report calls for the privatization of Fannie Mae and Freddie Mac, just as the Department of Justice is contemplating launching its own investigation into accounting irregularities at Fannie.

The report, which goes much deeper than the recent one by federal regulators, contends that housing is plentiful in the United States and the federal government need not be in the business of promoting homeownership. Further, given Fannie's status as a government-sponsored enterprise (GSE), taxpayers may be on the hook in the event of a financial crisis, despite the fact that the federal government does not formally guarantee Fannie securities.

"Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy" calls for the GSEs to cut their ties with the federal government and operate like normal corporations. New York University economist Lawrence J. White, a former Freddie Mac board member, argues that full privatization will help avoid a taxpayer bailout in the future.

"The special governmental links that apply to Fannie Mae and Freddie Mac yield little that is socially beneficial, while creating significant potential social costs," White argues. The best way to cut down on those costs and risks is privatization, he adds. "This would imply that the two companies would no longer enjoy any special privileges, but would no longer be restricted to their current narrow slice of the financial world. How these companies and their owners would fare in that scenario would then be a matter for markets, and not the Congress or OFHEO (Office of Federal Housing Enterprise Oversight), to decide."

White concedes that the current political climate, in all likelihood, will not allow full privatization, so he offers second-best solutions to protect taxpayers. He argues that Treasury Department oversight of GSEs should increase and "the secretary of the Treasury should state loudly and at frequent intervals that it is the policy of the federal government to adhere to what is stated on the Fannie Mae and Freddie Mac securities: that these are not obligations of the federal government and that the Treasury has no intention of `bailing them out' in the event that they become financially troubled."

With homes in the United States readily available, there is no reason for the federal government to remain in the business of encouraging homeownership, White concludes. But if Washington must continue doing so, there are more efficient ways than through Fannie and Freddie.

Policy Analysis no. 528