Unwinding Fannie and Freddie

Unwinding Fannie and Freddie

We have previously written on the difficulty of accounting for the costs of Fannie Mae and Freddie Mac in the federal budget. If you look at it from a purely accounting standpoint, they are a net gain for the federal budget, but on a risk-adjusted basis they are a loser because their conservatorship status makes the taxpayers responsible for potential losses.

But either way you slice it, these institutions’ balance sheets are far too large for a government-sponsored enterprise (GSEs). Writing in American Banker, the American Enterprise Institute’s Ed Pinto offers a policy to help unwind the GSEs’ balance sheets:

The only logical solution is to keep them in conservatorship and immediately begin to shrink them by administrative action. This can be done by following the precedent set by former acting FHFA Director Ed DeMarco. His annual scorecards resulted in shrinking the GSEs’ multifamily businesses so as to stop crowding out the private sector, led to increases in the guarantee fees charged on the GSEs’ single-family loan acquisitions, aligned fees so as to price for loan risk and largely eliminated the acquisition of loans with risky, very low down payments. [Link to scorecard added]

While fully privatizing the GSEs may seem like another logical solution, should another downturn put them in danger of insolvency, they will likely receive another bailout. (There would also likely be significant political and logistical hurdles associated with such a move, while Pinto’s solution can be accomplished administratively).

Pinto’s is a good solution, not only on policy grounds, but also because Fannie and Freddie have simply become too politically powerful. With around $5.5 trillion in assets, they have tremendous leverage to halt future reforms, as they have done in the past:

They were more powerful than the Federal Reserve, pushing back on former Chairman Alan Greenspan’s efforts to rein them in. And they were more powerful than the president, successfully fighting the Bush administration’s efforts to rein them in. In short, the GSEs placed themselves above the government that created them, making them a danger to democracy.

The ability of these regulated inmates to run the political asylum poses a serious threat to the rule of law and good policy in general. More direct approaches to subsidize homeownership (particularly for low-income families) would be preferable to the roundabout strategy that justifies Fannie and Freddie’s existence, but reform will only be possible if these behemoths are weakened.

I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
By |2019-03-27T10:49:51-07:00March 27th, 2019|Blog, Financial Regulation|