While Fannie Mae and Freddie Mac are not household names, they are important institutions because the U.S. Government is understood in the financial markets to guarantee their debt. This means that these two New York Stock Exchange companies can borrow money at lower interest rates, and operate with less capital, than any private sector company. They also are exempt from state corporation income taxes and Securities and Exchange Commission registration. Consequently, that they can overwhelm the nonsubsidized firms in any market they choose to enter. It also means that the taxpayers ultimately stand behind their debt obligations, which the authors of a new AEI study predict will reach $1.8 trillion by 2003.

Nationalizing Mortgage Risk, by Peter J. Wallison, a former general counsel of the Treasury, and Bert Ely, a financial consultant and specialist in financial institutions regulation, uses Fannie Mae's own earnings projections to show that within five years almost half of all mortgages in the United States will be on the books of these two companies. Their growth will come at the expense of genuinely private-sector businesses. Since taxpayers bear the risk of the financial obligations of both companies, anyone who recalls the thrift industry's collapse in the late 1980s will recognize that this is a prescription for another financial disaster. The authors will discuss the significant political and policy implications of the growth of Fannie Mae and Freddie Mac.