There is strong evidence that home ownership has positive spillover effects for society. However, the broad policies that encourage home ownership simply encourage the consumption of more housing—at the expense of other things—by those who would have bought anyway, with the consequence that our society’s resources are less efficiently allocated than would otherwise be the case.
The special governmental links that apply to Fannie Mae and Freddie Mac yield little that is socially beneficial, while creating significant potential social costs. The best policy would be to privatize them completely-that is, to sever all governmental links and convert them to truly “normal” corporations—as well as to pursue other measures that would better address the positive externality of home ownership and efficiently reduce the cost of housing. In the event that true privatization does not occur, suitable “secondbest” policies would include stronger statements by Treasury officials that the federal government has no intention of supporting the two companies, improved safety-and-soundness regulation of the two companies, limits on the amounts of their debt that can be held by regulated depository institutions, and increased efforts to focus Fannie Mae and Freddie Mac on the segment of the housing market where their social benefits would be greatest.
The Cato Institute
October 7, 2004