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Fannie Mae and Freddie Mac: How Can We Increase Their Support of the Mortgage Market?

Fannie Mae and Freddie Mac: How Can We Increase Their Support of the Mortgage Market?
2010Fair Credit/Fair Housing

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In September 2007 Fannie Mae and Freddie Mac failed and went into government hands. Since their failure a year ago, Fannie Mae and Freddie Mac have absorbed almost $ 100 billion of taxpayer funds to make up for losses at the two companies. The Treasury has committed up to another $ 300 billion to cover losses in the future. The Obama Administration is reviewing a range of options for the future of the two insolvent companies. This report proposes using Fannie Mae and Freddie Mac as wholly owned government corporations, i.e., government agencies, to support the mortgage market for the next five years. That support might include (1) funding new mortgages with lower borrowing costs, including prudent affordable housing loans, (2) providing help for troubled mortgage borrowers, (3) improving consumer protection for borrowers, and (4) supporting other government housing programs and especially the Federal Housing Administration (FHA). At the end of five years, when the housing market has stabilized, policymakers can decide on the ultimate future of the two organizations.

The first section of this report discusses how Fannie Mae and Freddie Mac failed and the sometimes unmanageable tension between private profits and their public missions. The second section discusses the continuing tension between private profits and public purpose now that the companies are in government hands, but with shareholders still in possession of a minority of stock of each company. This section also introduces the government corporation as an organizational form. The third section presents advantages of the government corporation in providing multiple forms of support for the mortgage market in ways that reflect the substantial taxpayer investment in Fannie Mae and Freddie Mac. The report concludes with the judgment that potential benefits over the next five years could be enormous. After that, when the financial system and housing market have stabilized policymakers will have a better idea what form the two government corporations should take to provide the support that may be needed for the longer term.