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  • A Housing Finance Market Without Fannie Mae and Freddie Mac

    What would the potential impact on the economy be if Fannie Mae and Freddie Mac—the housing finance government-sponsored enterprises (GSEs)—were eliminated?

    Our research indicates that winding down Fannie Mae and Freddie Mac from the mortgage market would have a minimal and predictable effect on the economy.

    Since 2008, Fannie Mae and Freddie Mac reside under the conservatorship of the Federal Housing Finance Agency (FHFA), and the agency debt and other mortgage holdings are directly guaranteed by the federal government. Their charter obligations include supporting the secondary market for residential mortgages, assisting mortgage funding for low-income and moderate-income families, and promoting access to mortgage credit in the U.S. (including central cities, rural areas, and underserved areas).

    Prior to conservatorship, Fannie and Freddie received the benefit of an implicit U.S. guarantee of their debt and mortgage-backed security obligations. Due to the size of these organizations and the unique relationship they hold with the federal government, they generate an interest rate subsidy in the mortgage market—likely about 25 basis points, or one-quarter on one percentage point.

    We assume that winding down these organizations from the mortgage market would remove this interest rate subsidy, and we therefore evaluate the effect that the subsidy’s removal would have on key economic and housing indicators.

    Why is this important to taxpayers?   

    The U.S. housing finance market is effectively nationalized today: The federal government underwrites about 90 percent of new mortgage originations in the U.S. Some advocates argue that the housing and mortgage market would not function today without federal government support.

    The irony is that the federal government played a central role in the unraveling of the U.S. mortgage and housing market. Over the past 20 years, the federal government’s housing policy and directives have played a leading role in industry-wide abandonment of underwriting standards, mostly to support affordable housing goals.

    The federal backing of the U.S. mortgage market has cost the federal taxpayer hundreds of billions of dollars due to the losses in the industry. It is not fair, nor efficient, to have the federal taxpayer at risk for future losses in the U.S. mortgage market. Americans and taxpayers would be better off in the long run with a mortgage market without GSEs.

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