How to Put an End to Fannie and Freddie
– January 10, 2012
By Viral Acharya, C.V. Starr Professor of Economics, Matthew Richardson, Charles E. Simon Professor of Applied Economics, Sidney Homer Director, Salomon Center for Research in Financial Institutions and Markets & Professor of Finance, Stijn Van Nieuwerburgh, Associate Professor of Finance & Yamaichi Faculty Fellow, and Lawrence White, Robert Kavesh Professorship in Economics & Deputy Chair of Economics
We propose an innovative “side-by-side” transition plan in which Fannie and Freddie will be phased out of existence: through a combination of a decrease in their investment holdings and an increase in the fees that they charge for their guarantees on their MBS.
It’s been over three years since Fannie Mae and Freddie Mac were placed in government conservatorships, effectively making them wards of the U.S. Treasury. These two large “government-sponsored enterprises” (GSEs) are emblematic of the excesses of residential mortgage lending in the decade of the 2000s. The Treasury has already made over $150 billion in capital contributions to keep them afloat, and there is at least another $50 billion – and possibly as much as $250 billion – still to come.
Nevertheless, there is widespread agreement that Fannie and Freddie need to be put out of their (and the taxpayers’) misery. With the government currently owning or insuring over 90% of all mortgages, there is a huge over-extension of government activity. In reality, securitizing and insuring residential mortgages should be predominantly a private sector activity.
But how to get from here to there? We propose an innovative “side-by-side” transition plan in which Fannie and Freddie will be phased out of existence: through a combination of a decrease in their investment holdings and an increase in the fees that they charge for their guarantees on their MBS. Both of these steps will open up opportunities for the private sector – which currently can’t compete in the presence of government subsidies – to re-enter these activities.
Real full article as published in Forbes.
Nevertheless, there is widespread agreement that Fannie and Freddie need to be put out of their (and the taxpayers’) misery. With the government currently owning or insuring over 90% of all mortgages, there is a huge over-extension of government activity. In reality, securitizing and insuring residential mortgages should be predominantly a private sector activity.
But how to get from here to there? We propose an innovative “side-by-side” transition plan in which Fannie and Freddie will be phased out of existence: through a combination of a decrease in their investment holdings and an increase in the fees that they charge for their guarantees on their MBS. Both of these steps will open up opportunities for the private sector – which currently can’t compete in the presence of government subsidies – to re-enter these activities.
Real full article as published in Forbes.
