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.
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 2025 basis
points, but that the U.S. housing market would continue to