Many people want to tighten federal regulations governing the government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. But better regulations will not do much to reduce the real risks that the GSEs create for U.S. taxpayers and the economy, and aren’t likely to have real force.

Fannie and Freddie are the most politically powerful companies in America. The S&L debacle of the late 1980s showed that politically powerful organizations can intimidate regulators and stave off tough regulation. Under these circumstances, privatization—the elimination of government backing—is the only viable way to protect the taxpayers and the economy against the consequences of major financial difficulties at one or more of the GSEs.

Opponents of privatization believe that Fannie Mae and Freddie Mac would be even more powerful as privatized entities. Fannie and Freddie would be able to obtain better financing than their competitors, according to this line of thinking. Concerns have also been raised about whether the privatization of Fannie and Freddie would disrupt the residential finance market or raise mortgage rates for home buyers.

The plans in this book together address these concerns. Thomas H. Stanton demonstrates that it is possible to cut the ties between the government and the GSEs—and to create a fully competitive private mortgage market—without disrupting the current system of residential mortgage finance. Financial consultant Bert Ely shows that it would be possible to obtain lower mortgage rates than currently offered by Fannie and Freddie, without any government involvement.

The book presents a complete legislative proposal to enact these plans, along with a detailed section-by-section analysis of the bill.

Visit Privatizing Fannie Mae, Freddie Mac and the Federal Home Loan Banks: Why and How Download Page

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Paperback: 120 pages
Authors: Peter J. Wallison, Thomas H. Stanton, Bert Ely
Publisher: AEI Press (September 25, 2004)
Language: English
ISBN-10: 0844741906
ISBN-13: 978-0844741901

INTRODUCTION AND SUMMARY
Peter J. Wallison

WHY
The first question everyone asks about a project to privatize Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (collectively, the housing GSEs) is, Why? This question has two levels. The first is substantive: The U.S. housing finance system performs very well, or at least adequately; there are few complaints; why do you want to change it? The second is political: Yes, there are problems, but they can be addressed through better regulation; why bother to privatize these companies when there is very little political opposition to improving how they are regulated and quite a bit of opposition to privatization?

The answer to both questions is relatively simple. The housing GSEs contribute little to the quality of the U.S. housing finance system, yet they create risks for the taxpayers and the entire economic system that cannot be adequately addressed by regulation. A sound privatization program should solve both problems, providing an improved housing finance system and eliminating the risks that the housing GSEs—and particularly Fannie Mae and Freddie Mac—create for the taxpayers and the economy generally.

In this monograph, we propose a comprehensive privatization program, including a privatization plan that will eliminate the housing GSEs as government wards without disrupting the residential mortgage market, and a complementary plan for a housing finance system in the United States that will deliver benefits to homeowners that are at least equivalent to the benefits delivered by the housing GSEs, without the necessity for government backing. Legislation to implement this program is attached to this summary. ...

ABOUT THE AUTHORS
Peter J. Wallison joined AEI in 1999 as a resident fellow and the codirector of AEI’s program on financial market deregulation. As a partner of Gibson, Dunn & Crutcher LLP, he practiced banking, corporate, and financial law in the firm’s Washington and New York offices. As the general counsel of the Treasury Department from 1981 to 1985, Mr. Wallison helped develop the Reagan administration’s proposals for deregulating the financial services industry. In 1986 and 1987, Mr. Wallison was counsel to President Ronald Reagan.

He is the author of Back from the Brink: A Practical Plan for Privatizing Deposit Insurance and Strengthening Our Banks and Thrifts (1990); the coauthor of Nationalizing Mortgage Risk: The Growth of Fannie Mae and Freddie Mac (2000) and The GAAP Gap: Corporate Disclosure in the Internet Age (2000).

He edited Serving Two Masters, Yet Out of Control: Fannie Mae and Freddie Mac (2001) and Optional Federal Chartering and Regulation of Insurance Companies (2000), all of which were published by the AEI Press. Mr. Wallison’s most recent book is Ronald Reagan: The Power of Conviction and the Success of His Presidency (Westview Press, 2002).

Thomas H. Stanton is a Washington, D.C.–based attorney. His practice relates to the capacity of public institutions to deliver services effectively, specializing in government organization and program design, financial regulation, government corporations, government-sponsored enterprises, and privatization. Mr. Stanton is a former member of the federal senior executive service.

He chairs the Standing Panel on Executive Organization and Management at the National Academy of Public Administration and is a fellow of the Center for the Study of American Government at Johns Hopkins University, where he teaches the law of public institutions.

Mr. Stanton’s writings include A State of Risk (HarperCollins, 1991), Government-Sponsored Enterprises: Mercantilist Companies in the Modern World (AEI Press, 2002), and many articles. Mr. Stanton’s most recent book, which he edited with Benjamin Ginsberg, is Making Government Manageable (Johns Hopkins University Press, 2004).

Bert Ely is a financial institutions and monetary policy consultant. The principal at Ely & Company, Inc., in Alexandria, Virginia, he has specialized in deposit insurance and banking-structure issues since 1981. In 1986, he was one of the first analysts to predict a taxpayer bailout of the Federal Savings and Loan Insurance Corporation. He monitors conditions in the banking and thrift industries, the politics of the credit-allocation process, and issues concerning monetary policy and the payments system.

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