Cato Policy Analysis No. 293 December 29, 1997

Policy Analysis

The Mounting Case For Privatizing Fannie Mae And Freddie Mac

by Vern McKinley

Vern McKinley has worked as a financial analyst for various federal financial agencies including the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Resolution Trust Corporation. He is currently an attorney in Washington, D.C. The views presented are his own.


Executive Summary

Two of the largest government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), receive government subsidies estimated to be worth $6 billion. Of that total, an estimated $2 billion goes directly as income to shareholders and employees of Fannie Mae and Freddie Mac. By design, the remainder of the subsidy largely diverts investment into the middle- and upper-income housing sector and away from capital sectors of the economy.

Fannie Mae and Freddie Mac preserve their privileged status through a multi-million-dollar lobbying effort that includes massive "soft money" campaign contributions and the payment of exorbitant salaries to politically connected executives and lobbyists. The GSEs also protect their government-sponsored empire through millions of dollars of charitable donations to Washington advocacy groups.

Because of their quasi-governmental status, there is a market perception that Fannie Mae and Freddie Mac mortgage-backed securities and debt carry an implicit federal guarantee against default. Hence, the GSEs expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify.

To remedy the situation, those GSEs should be stripped of the privileges of government sponsorship and be converted to fully private enterprises. The only remaining questions for analysis are when and how privatization should occur.

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