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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Poverty in America—and What to Do About It
image GDP for second quarter: Strong headline, weak innards
image Paul Ryan and the emerging conservative reform agenda in higher education
image Democrats' impeachment fixation
AEI on Facebook
Events Calendar
  • 04
    MON
  • 05
    TUE
  • 06
    WED
  • 07
    THU
  • 08
    FRI
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.