Fannie Mae's and Freddie Mac's changing roles and reform initiatives - Research Notes & News - Brief Article

EconSouth, Summer, 2002

Three government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac and the Federal Home Loan Bank System--were created to make home mortgage financing more readily available by supplementing local funding. But today retail lenders can tap national markets, so now the main contribution of the three housing GSEs is providing homebuyers an interest rate subsidy.

In two recent articles, W. Scott Frame and Larry D. Wall examine a number of issues concerning these GSEs. The first article looks at the economic issues arising from the GSEs' provision of interest rate subsidies. The GSEs can provide lower rates to home mortgage borrowers mainly because of the subsidies the GSEs receive via their relationship with the federal government. The largest subsidy is the financial markets' perception that the GSEs' securities are implicitly guaranteed by the government. The authors focus on two public policy debates sparked by this relationship: whether the GSEs are efficient mechanisms for subsidizing housing and whether implicit guarantees of their liabilities are the best way to subsidize them.

In their second article, Frame and Wall evaluate six voluntary initiatives that Fannie Mae and Freddie Mac announced in 2000. One initiative would enhance market discipline by having the GSEs issue subordinated debt. A second would require the GSEs to maintain more liquid securities portfolios. The other initiatives would increase transparency through the GSEs' disclosures of credit and interest rate losses, annual credit ratings and compliance with capital adequacy standards.

Frame and Wall evaluate the initiatives from the perspective of current banking standards. Their analysis suggests that Fannie Mae's and Freddie Mac's initiatives are beneficial but could be made more effective.

ECONOMIC REVIEW FIRST QUARTER 2002