Fannie and Freddie Are Already Part of the State
Letter to the Editor

Sir, In their report "Government tightens grip on Fannie and Freddie" (February 20) your correspondents wonder whether the government, while it has them in its grip, should also formally guarantee their obligations. Of course, both are insolvent, if you don't count the preferred stock bought by the government--their common stock is down 99 per cent and represents a mere option on possible resuscitation.

So Fannie and Freddie have already become part of the government. They have changed from being government-sponsored enterprises to being government housing banks. As such, they are available to be directed by the government to participate in refinancing the mortgage bust based on policy, not profit. The government, as managing agent for the involuntary taxpayer investors, is already fully and in fact on the hook for all their debt and mortgage-backed securities obligations. But this is not legally explicit, as your article points out, and some Asian investors have already announced they will not buy any more of their securities without a formal guaranty.

Why create this bond market perceived risk, since the public in fact has all the risk already? Using Fannie and Freddie to address the bust would be cheaper and easier if Congress (it takes Congress) would simply enact an explicit guaranty, reflecting reality. The resulting guaranteed government housing banks should be a transition status with a firm sunset in five years. At that point, the long-term restructuring of Fannie and Freddie should be effected, making part of them truly private businesses, and part of them truly government agencies. The result: no GSEs would be left--a consummation devoutly to be wished.

Alex J. Pollock is a resident fellow at AEI.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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