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Abstract

The portfolios of mortgages and mortgage-backed securities held by Fannie Mae and Freddie Mac have now become the central issue in the legislative battle over improvements in their regulation. But it was not always so. When the notion of improving their regulation was first advanced in 2000, the objective of those who favored tighter regulation was far more limited. Only after it was found that Freddie Mac had violated accounting rules did policy-makers--and particularly Fed chairman Alan Greenspan--begin to suggest that the only way to protect against the systemic risk associated with the GSEs was to limit, reduce or eliminate their portfolios of mortgages and mortgage-backed securities. If this approach is ultimately adopted by Congress, it will substantially reshape their business model and perhaps induce them to give up their government charters. 

Peter J. Wallison is a resident fellow at AEI.

 The full text of this paper is available here as an Adobe Acrobat PDF.