Financial Update (Fourth Quarter 2004)



FEATURES

 Appraisal Reviews
 Maintain Soundness

 GLBA Spurs
 Banks’ Insurance
 Activities

 Conference Focuses
 on Remittances

 New Fed
 Brochures About
 Check 21

 Fed Distributes
 Redesigned $50s

 Atlanta Fed Chair,
 Vice Chair
 Reappointed

 Will Privacy
 Concerns Prolong
 Cash Use?

 Fed Governor
 Sees Oil Prices
 Staying High

 Greenspan on
 Challenges of
 Aging Population

 Helping Consumers
 Avoid Overdrafts

 Examining Fannie
 Mae and
 Freddie Mac

DEPARTMENTS

 Data Bank

 Circular Letters

STAFF

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Examining the States of Fannie Mae and Freddie Mac

Housing enterprises Fannie Mae and Freddie Mac have garnered a great deal of recent attention for their accounting practices. The debate over what should happen if one or both of these government-sponsored enterprises (GSEs) become insolvent is a heated one since neither is subject to U.S. bankruptcy code and neither can be placed in receivership. Further, while the government is under no obligation to bail out Fannie Mae or Freddie Mac, the widespread assumption is that it would do so if the situation arose.

Related
“Resolving Large Financial Intermediaries: Banks versus Housing Enterprises”
“Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?”
Systemic risk: Fannie Mae, Freddie Mac and the role of OFHEO
Fannie Mae
Freddie Mac

Contemplating GSE contingencies
Two recent Atlanta Fed working papers examine the two GSEs and the particular considerations that arise because of their unique structures and implicit ties to the U.S. government. In “Resolving Large Financial Intermediaries: Banks versus Housing Enterprises,” Robert Eisenbeis, Scott Frame, and Larry Wall evaluate the policy issues associated with the resolution of an insolvent GSE. They explore how the procedures for resolving a large bank might apply to the resolution of a housing enterprise. “Absent compelling differences, we should exploit our understanding of bank resolution issues to fashion similar policies and procedures for resolving housing enterprises,” they argue.

They recommend that the GSEs’ supervisor, the Office of Federal Housing Oversight (OFHEO), be given receivership power similar to that of bank supervisors, that prompt corrective action for a housing enterprise be based on market values, and that OFHEO establish a plan for the enterprises' resolution.

Suggesting policy improvements
In “Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?” Scott Frame and Lawrence White describe the role of the two GSEs in the residential mortgage markets and the controversies that surround the two firms.

The authors also make some suggestions for improvements in public policies that apply to Fannie and Freddie. Their primary recommendation is that the two GSEs be privatized so that they would not enjoy any special privileges but would also no longer be restricted to the narrow slice of the financial world they now occupy. Frame and White estimate that this action would have only a modest effect on the residential mortgage markets, pushing mortgage rates up a mere 20–25 basis points, but that the U.S. housing market would continue to grow.

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