It’s time to rethink role of Fannie Mae and Freddie Mac

Until recently, government financial guarantees backstopping Freddie Mac and Fannie Mae were merely implicit. But with the two mortgage financing giants teetering on collapse, Congress has been forced to step in and make the guarantees official, a move that could potentially cost taxpayers billions.

The question is what to do next.

As government-sponsored enterprises, Fannie and Freddie have long had one foot in the free market and the other firmly planted on Capitol Hill. To get their way through the years, both agencies have spent millions of dollars on campaign contributions, lobbyist fees and foundation grants unavailable to true government agencies. At the same time, the pair has been exempt from local and state taxes, giving them a financial advantage over truly private competitors. They also paid lower rates than their private competitors because investors assumed taxpayers would ultimately make good on their obligations, come what might.

In return, of course, Fannie and Freddie have played a valuable role in mortgage markets, buying home loans, repackaging them and selling the end products to investors. Millions of Americans likely would not own their homes today without assistance from those two agencies.

Even so, government should ask if there’s a better, more efficient way to undergird the market and deliver the same impact. Most likely, there is.

Given that Fannie and Freddie own or back nearly half of U.S. mortgages, Congress and regulators had no real choice in the short term but to craft the financial bailout plan, putting taxpayers on the line for tens of billions of dollars should they fail. Fannie and Freddie indeed became too big and too important to let fail.

By clarifying just what that much-hyped “implicit” government backing of the two agencies really means, Congress and the U.S. Treasury Department injected some much-needed stability into the housing sector as it thrashes about in search of equilibrium. But that doesn’t mean the status quo has to continue into infinity. Nor does it mean Fannie, Freddie and their friends inside the Beltway and on Wall Street should be free to reap big profits on the current situation, knowing that U.S. taxpayers are bound to ride to the rescue, multizeroed checks at the ready, should things get out of hand.

In analyzing the matter, Congress should start with the belief that the time may have come, as the Cato Institute urges, to start dismantling Fannie and Freddie as we have come to know them. That step would allow the private sector to gradually assume their role of risk-taking in the marketplace. At the very least, numbers need to be crunched and a spirited public debate should begin over the spreadsheet results and what they portend for Fannie and Freddie’s future.

Among the advocates for phasing out Fan and Fred is William Poole, a Cato Fellow and, until earlier this year, president of the Federal Reserve Bank of St. Louis.

In a New York Times op-ed piece recently, Poole argued that “Fannie Mae and Freddie Mac are not essential to the mortgage market; if they were put out of business in an orderly fashion over five to 10 years, the market would pick up the business they abandon.”

Sounds like a reasonable thesis.

Until that premise is examined fully, taxpayers should fervently hope that a costly bailout won’t be needed.

— Andre Jackson, for the editorial board