Research & Commentary: Freddie Mac and Fannie Mae’s Blank Check

Published January 5, 2010

In 2008 the Bush administration’s Treasury Department seized control of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that stand behind a majority of the nation’s $12 trillion mortgage market. Despite the stated goal of both the Bush and Obama administrations to shrink Freddie and Fannie’s outsize influence on the economy, the two organizations have continued to grow, with the number of past-due mortgages guaranteed by each agency rising each month.

On Christmas Eve 2009 the Treasury Department decided to up the ante by essentially removing the cap on the amount of funds the Treasury Department is allowed to send Fannie and Freddie. This blank check allows for unlimited future bailouts of the beleaguered firms. The timing of the decision is suspect, for if Treasury had waited until December 31 the change would have required Congressional consent.

When the taxpayer guarantees provided through Fannie Mae, Freddie Mac, the Federal Housing Administration, and Ginnie Mae are taken as a whole, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee. These new liabilities are equal to $3,800 for every American citizen.

Supporters of the rescue plan say Fannie and Freddie are “too big to fail” and are a crucial source of funding for banks and other home lenders, and thus are more important than ever during the current mortgage crisis.

Critics of the plan say the current crisis should be viewed as an opportunity for reform, perhaps even privatization. The expansion of Fannie, Freddie, et al. has been all risk and no reward for U.S. taxpayers. Matt Kibbe, president of FreedomWorks, said, “Congress, in its failure to act in the past on GSE reform, helped create the current conditions at Fannie Mae and Freddie Mac, and now Congress must stop the rising risk to taxpayers and let these private companies sink or swim in the market.”

The following articles examine the changing role of Freddie Mac and Fannie Mae, their effect on the mortgage market, and the cost paid by taxpayers. They also discuss possible alternatives to the current system, including privatization.

Fannie and Freddie’s Home Inequity
Peter Eavis of The Wall Street Journal discusses the Treasury Department’s decision to raise the rate cap for Treasury Department assistance to Freddie and Fannie.

Time to Reform Fannie Mae and Freddie Mac
Ronald D. Utt, Ph.D., a senior research fellow at The Heritage Foundation’s Roe Institute for Economic Policy Studies, identifies the limited value Fannie and Freddie add to the mortgage market. Utt offers a plan for an ordered privatization.

End the Mortgage Duopoly
Cato Institute Senior Fellow Gerald P. O’Driscoll Jr. advocates removing Fannie and Freddie’s protected status and subjecting them fully to market competition.

The Case for Privatizing Fannie Mae and Freddie Mac Grows Stronger
American Enterprise Institute Resident Fellow Peter J. Wallison discusses the treatment of Fannie and Freddie in the media and government and proposes his own privatization plan to alleviate the mortgage giants’ woes.

It’s Time to Privatize Fannie Mae and Freddie Mac
Claremont McKenna College economics professor Gregory D. Hess explains that stopgap regulatory changes will not fundamentally alter the taxpayers’ risk, but removing the government’s implicit guarantee will.

Downsize Fannie Mae and Freddie Mac
The Christian Science Monitor proposes shrinking Fannie and Freddie to limit their effect on the housing market. This is a step back from the publication’s earlier call for privatization but is perhaps a more likely prospect for implementation.

Nothing in this document is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and PolicyBot, Heartland’s free online research database.

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