Housing Enterprises

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises with $1.4 trillion in combined obligations as of the end of 1995. In response to growing concern over the potential risk that these obligations pose to taxpayers and questions about their continued need for government-sponsored status, GAO studied the effects of repealing the charters of Fannie Mae and Freddie Mac, eliminating any federal sponsorship, and allowing them to operate as fully private corporations. This report assesses the effects of privatization on (1) the enterprises; (2) residential mortgage markets in general; and (3) housing finance, homeownership, and housing affordability for low- and moderate-income families and residents of underserved areas. GAO also identifies and discusses other policy options that Congress may want to consider to limit the enterprises' potential risk to taxpayers or increase their social benefits.

GAO noted that: (1) the privatization of Fannie Mae and Freddie Mac would have a major impact on both the secondary and primary mortgage markets; (2) if the two government-sponsored enterprises lost the benefits of their federal charter, their costs would increase because they would be responsible for paying Securities and Exchange Commission registration fees on their securities or state and local taxes; (3) by eliminating or reducing the implied federal guarantee on mortgage-backed securities (MBS) and debt, the enterprises' borrowing costs would increase from 30 to 106 basis points if the perceived federal guarantee were completely eliminated; (4) these increased costs would be passed to the homebuyer and the average mortgage interest rate would increase by 15 to 35 basis points; (5) eliminating the cost advantages of federal sponsorship could spur more competition and retain liquidity in the secondary market because firms would find it profitable to purchase and securitize conforming mortgages; (6) privatization could stabilize the securities market and prevent it from experiencing regional disparity; (7) privatization would pose an adverse threat to the enterprises' financial performance because they would be more dependent on their strategic business decisions and total quality management; (8) low and moderate-income borrowers would be most impacted by the enterprises' privatization because the federal programs providing credit to these groups would be eliminated; and (9) alternative initiatives should be studied to limit the risk to taxpayers.