In late 2004, federal regulators charged Fannie Mae with a
series of questionable accounting practices that had caused an
overstatement of earnings and an understatement of risk.
Although Fannie Mae denied the accusations, a review by the
Securities and Exchange Commission confirmed them. Within a few
weeks, its top officers had resigned.
Congress responded with a series of extensive hearings, and in May
the House Committee on Financial Services reported out H.R. 1461, a
bill lawmakers said would rectify the problem by creating new
Fannie Mae's private-sector competitors and White House officials,
though, say the proposals are too timid and would leave the
institution operating in a less restrictive regulatory environment.
Plus, the new regulations would sustain the powerful co-monopoly
position Fannie Mae shares with its sister government-sponsored
enterprise (GSE), Freddie Mac, which suffered its own accounting
lapses in 2003.
The new proposal also would require the GSEs to use a portion of
their profits (5 percent) to fund "affordable" housing programs in
a clumsy effort to contrive a costly public purpose to enterprises
that long ago outlived any justification for the valuable
privileges the GSEs receive from the federal government - chief
among them emergency access to U.S. treasury and Federal Reserve
Many in the global financial markets view this potential access to
federal credit as providing an implicit federal guarantee to their
debt - a guarantee that allows the GSEs to borrow at interest below
the best private corporations and slightly ahead of what the U.S.
Lawmakers failed to address those broader issues of privilege
because they focused on Fannie Mae's Enron-like behavior instead of
its market power. By controlling half the residential mortgage
market, the GSEs deter competition and force the housing and
housing-finance markets to rely on two financially unstable
With such market power concentrated in the hands of two
institutions, the stability of U.S. financial markets could be
undermined by financial problems in just one of them. Taxpayers
would be on the line if a bailout were required. GSE defenders
contend such risks are remote and offset by the benefits that GSEs
provide the housing market, but critics contend those benefits are
While there are many studies that question the impact of GSEs on
homeownership or home construction, broad mortgage and
housing-market trends over the past several decades reveal their
limited influence. America's greatest surge in homeownership, for
example, took place between 1946 and 1960, when the homeownership
rate jumped from no more than the mid-40-percent range at the end
of World War II to 62 percent in 1960, a period during which Fannie
Mae's activity was limited and Freddie Mac didn't exist.
In 1965, when the GSE and other federal programs accounted for 6
percent of the mortgage market, America's homeownership rate was
63.3 percent. By 1990, after outstanding residential mortgage
credit expanded more than tenfold, and when the federal and GSE
presence in the residential mortgages grew to nearly half the
market, America's homeownership rate was at 63.9 percent, an
improvement of less than 1 percent.
With benefits modest and market risk considerable, a better reform
is to phase out the significant federal credit privileges the GSEs
possess, allowing them time to adjust to a more competitive
environment. To implement this orderly withdraw of federal
- The U.S. Treasury should phase out the GSEs' line of credit
over a five-year period in annual increments of $500 million for
- Congress should immediately eliminate the Federal Reserve's
authority to buy GSE debt.
- The GSEs should lose their exemption from state and local
As these reforms are under way, the GSEs' skilled work force
could concentrate on securing residential mortgages in a fair and
open competition with dozens of new entrants from the private
sector who would be attracted to the market by the level playing
field such deregulation would offer.
If the GSEs are as effective as they claim, they would welcome such
a contest. But don't bet the house on it.
Ron Utt of Falmouth
is a senior research fellow at the Heritage Foundation.
First appeared in The Hill