Fannie Mae and Freddie Mac have been criticized for not providing enough home loan assistance to low-income and minority families. As AEI's Peter J. Wallison has relentlessly argued, Fannie Mae and Freddie Mac must serve dual purposes: fulfilling their government mission--for which they receive an annual subsidy, estimated by the Congressional Budget Office to have been worth $20 billion in 2003--and their obligation to shareholders to maximize profitability. While the U.S. Department of Housing and Urban Development (HUD) has proposed stricter federal regulation, Wallison, along with coauthors Thomas H. Stanton and Bert Ely, argues in Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: Why and How (AEI Press, 2004) that Fannie Mae and Freddie Mac do not, in fact, provide better services than the general marketplace can for affordable home loans and should therefore lose their government backing.

In Wallison's view, HUD should not have to impose stricter regulation on the two entities to force them to perform the mission for which they receive a federal subsidy, and further regulation will not eliminate the risk posed to American taxpayers and the overall economy should Fannie Mae and Freddie Mac--whose incurred obligations totaled $4 trillion by the end of 2003--face financial difficulty.

Stanton, a Washington, D.C.-based attorney, outlines a plan to privatize these government-sponsored enterprises (GSEs) and create a fully competitive private mortgage market without disrupting the current system. It requires the GSEs to cease purchasing mortgages and mortgage-backed securities for their portfolios but would allow them to continue securitizing mortgages by creating and guaranteeing mortgage-backed securities for six months following implementation. Within five years, the GSEs would have to liquidate their mortgage portfolios and pay off the associated liabilities.

Ely, a financial and monetary policy consultant, argues that with the GSEs privatized, mortgage rates would be achievable at lower rates than currently offered by Fannie Mae and Freddie Mac. How? By eliminating the 20-basis-point financing advantage the companies hold over other financial institutions and by getting rid of origination costs associated with selling mortgages to third parties, banks, and other originators.