The Mounting Case for Privatizing Fannie Mae and Freddie Mac

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.

Vern McKinley

The Cato Institute

December 29, 1997

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