Mercatus Study Analyzes Housing Finance Giants

Posted: November 21, 2001 at 1:00 am, Last Updated: November 30, -0001 at 12:00 am

While Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System (FHLB) have contributed to one of the most dynamic mortgage markets in the world, their growing debt and their expanding scope could be harmful to consumers, according to a new study by Mercatus Center research fellow Jay Cochran and Marymount University assistant professor Catherine England.

The study, Neither Fish Nor Fowl: An Overview of the Big Three Government Sponsored Enterprises in the U.S. Housing Finance Markets, estimates that from 1995 to 2000, growth of the U.S. mortgage market averaged just 8.2 percent annually, while growth of the government-sponsored enterprises (GSEs) was at least double, and in some cases, triple that amount. This rapid growth is due in large part to the special privileges conferred on GSEs by their congressional charters, including their tax-exempt status and favorable treatment by banks and regulators.

“These privileges do more than just give the GSEs a funding cost advantage, they also reinforce the perception of a federal guarantee on GSE debt obligations,” says Cochran. “In order to avoid a federal bailout like the one we saw with the savings and loan industry, policymakers may want to consider a variety of alternatives, including privatization of one or more of the GSEs.”

Cochran pointed out that the study is designed to provide background to policymakers and regulators as they consider such questions as whether or not to expand the charters of the GSEs into the areas of jumbo loans or nonhousing related finance, and what would be the consequences of a government sponsored enterprise failure. For more information on the study, visit the Mercatus Center web site.

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