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.
Peter J. Wallison is a resident fellow at AEI and the codirector of AEI’s program on financial market deregulation.
Thomas H. Stanton is a Washington, D.C.–based attorney.
Bert Ely is a financial institutions and monetary policy consultant.