Time to privatize Fannie and Freddie? How about a compromise?
The CBO weighs in on the idea of a private-public hybrid compromise for Fannie Mae and Freddie Mac.
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Regardless of its exact design, a hybrid model with explicit federal backing for qualifying privately issued MBSs would have several advantages over the precrisis model, as well as over either a fully federal agency or complete privatization (approaches that are discussed below). An explicit federal guarantee would help maintain liquidity in the secondary mortgage market, in normal times and particularly in times of stress, and could retain the standardization of products offered to investors that Fannie Mae and Freddie Mac bring to that market. Compared with the precrisis model, imposing guarantee fees would ensure that taxpayers received some compensation for the risks they were assuming.Skip to next paragraph
Donald B. Marron is director of economic policy initiatives at the Urban Institute. He previously served as a member of the President's Council of Economic Advisers and as acting director of the Congressional Budget Office.
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Compared with a fully federal agency, a hybrid approach would lessen the problem of putting a large portion of the capital market under government control, encourage the inflow of private capital to the secondary market, and limit the costs and risks to taxpayers by having private capital absorb some or most losses. Putting private capital at risk would also provide incentives for prudent management and pricing of risk.
Compared with a fully private market, hybrid proposals would give the government more ongoing influence over the secondary market and an explicit liability in the case of large mortgage losses that would be reflected in the budget. That arrangement might have the advantage of leading to a more orderly handling of crisis situations.
Disadvantages of a Hybrid Approach
Relative to other approaches, a public/private model has a number of potential drawbacks, the importance of which differs depending in part on the specific design chosen. Experience with other federal insurance and credit programs suggests that the government would have trouble setting risk-sensitive prices for guarantees and probably would shift some risks to taxpayers. A hybrid approach also might not eliminate the tensions that exist—with regard to risk management and pursuit of affordable housing goals—between serving private shareholders and carrying out public missions.
Another concern is that over time, the secondary-market entities might push for broader guarantees of their product lines and attempt to reestablish themselves as too-big-to-fail institutions backed by implicit federal guarantees. Consequently, regulators would need to be vigilant to control risks to the financial system and avoid regulatory capture, while also being open to market innovations.
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