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Studies on Privatizing Fannie Mae and Freddie Mac, 1996


Report Acceptance Date: May 1996 (400 pages)

Posted Date: May 01, 1996

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Studies on Privatizing Fannie Mae and Freddie Mac, a collection of papers and academic commentaries, reports on the likely effects of privatizing the Nation's largest secondary mortgage market institutions, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). HUD's Office of Policy Development and Research and three other Federal agencies commissioned background papers to support each agency's independent preparation of a report to Congress on the issue of privatizing the two government-sponsored enterprises (GSEs).

In the first paper, Thomas H. Stanton finds that although privatizing the GSEs would be a "massive and complex undertaking," it is possible and maybe even desirable from an efficiency standpoint. Stanton offers several options on how the privatized GSEs might be restructured. However, he concludes that political consensus on privatization is essential, and that in its absence, legislation would better be directed to providing a framework through which privatization could be accomplished in the future.

Robert F. Cotterman and James E. Pearce analyze the effects of Fannie Mae and Freddie Mac on conventional fixed-rate mortgage yields in a 5-year comparison of the interest rates on loans that meet Fannie Mae's loan limits to those that exceed them (so-called jumbo loans). They find that jumbo rates were higher, reflecting the implicit Federal backing of GSE securities. However, the extent to which mortgage interest rates would change after full privatization of the GSEs remains uncertain.

Brent W. Ambrose and Arthur Warga, assuming that privatization will eliminate market premiums that the GSEs enjoy on their securities, estimate the costs of privatization. They argue that the GSEs' capital costs -- currently lower than the private sector's because of the State and local tax exemptions and lower borrowing costs afforded the GSEs by their Federal status -- would increase after privatization and be passed on to consumers.

Benjamin E. Hermalin and Dwight M. Jaffee describe the likely effects of privatization on the structure and performance of the secondary mortgage market. The researchers expect the privatized GSEs to merge with primary market actors and expand the scope of their activities, generating efficiency gains. They also conclude that market imperfections are unlikely to present efficiency problems for fully privatized GSEs. Although privatization would create winners and losers, they predict that the overall impact would be positive.

Susan Wachter and four other researchers project the impact of privatization on the social objectives of the GSEs. They conclude that repealing the GSEs' Federal charters would decrease homeownership by pushing up single-family mortgage costs. However, it would only slightly affect the availability of multifamily housing financing. The social costs of privatization would fall disproportionately on African Americans, lower income households, and those living in central cities.

The researchers conclude that, as GSEs, Fannie Mae and Freddie Mac are well-structured and efficient providers of targeted social benefits. This volume offers contrasting analyses of issues in the complex debate over privatizing the GSEs.

Publication Categories: Publications     Housing Finance     Government Sponsored Enterprise    


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