“The Present Condition and Future Status of Fannie Mae and Freddie Mac”

[Mike Kennedy]

Potential GSE Structures​

With those principles in mind, we can consider issues related to the structure of the
Enterprises or successor institutions such as their ownership structure, range of activities,
regulatory environment, and housing policy mission.

With respect to ownership structure, there are three basic options for the future of Fannie
Mae and Freddie Mac: government agency, GSE, or fully private firms. Each of these
options has several variants, and each variant in turn will have its own advantages and
disadvantages.

The first option would be the equivalent of nationalizing the Enterprises.
One variation of that idea would be to merge them with either FHA or Ginnie Mae. I am
opposed to nationalization because government insurance programs are particularly high
risk and rife with moral hazard. The FHA model is being tested right now. The present
mortgage market difficulties do not provide a sound rationale for permanently​

nationalizing the $11.9 trillion mortgage market.

 

[Randolph Kinney]

The irony is that it is the government that sets interest rate policy and it is government that sets risk through regulation.

Banks get whipped sawed every time the economy goes into recession. To help banks' profitability, the government lowers the interest rates and flood the banks with money to increase lending.

The GSEs are really an extension of investment banking; a function that Wall Street fulfilled but with guarantees. We see what happens to investors that buy Wall Street MBSs; they suffer losses with out guarantees.

The GSEs exist to lower the interest rates to borrowers and transfer the risk from investors to the government. Private enterprise could never operate this way.