Policy Documents

Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy

Lawrence J. White –
October 7, 2004

In this Policy Analysis, Lawrence White writes that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are the two dominant entities in the secondary residential mortgage markets of the United States. They are an important and prominent part of a larger mosaic of extensive efforts by governments at all levels to encourage the production and consumption of housing.

Fannie Mae and Freddie Mac are a unique part of this effort. Though they appear to be “normal” corporations, each with shares that trade on the New York Stock Exchange, they in fact have federal government origins and entanglements that make them quite special. Their specialness is a double-edged sword, however. On one side, they cause interest rates on many residential mortgages to be lower than would otherwise be the case; on the other, their size and mode of operation have created a significant contingent liability for the federal government and, ultimately, for taxpayers. In addition, their size and prominence has recently led to concerns about the larger consequences for the U.S. economy if either were to experience financial difficulties.

There is strong evidence that home ownership has positive spillover effects for society. However, the broad policies that encourage home ownership simply encourage the consumption of more housing—at the expense of other things—by those who would have bought anyway, with the consequence that our society’s resources are less efficiently allocated than would otherwise be the case.