How to Put an End to Fannie and Freddie
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
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.