Commentary

Time to reform, fully privatize Fannie and Freddie

The Winter 2008-09 issue of Regulation magazine has an article by University of California at Berkeley finance professor Dwight Jaffee arguing for the full privatization of recently nationalized mortgage giants Fannie Mae and Freddie Mac. Jaffee presents an alternative reform that refocuses Fannie and Freddie on the middle-income mortgage market. This allows them to be fully privatizated, letting the Federal Housing Administration (FHA) and VA focus on the low-income housing market.

This article has provided a framework and a specific proposal for the reregulation of Fannie Mae and Freddie Mac in the aftermath of the subprime mortgage crisis and their conservatorship. The mimp proposal would end the mortgage giants as we know them, reassembling the components of the two gses into an equitable and efficient structure. Fannie and Freddie’s mbs issue/guarantee business would be transferred to a government agency, where it would support the middleincome mortgage market in the United States in parallel with the longstanding and successful fha and Ginnie Mae programs for lower-income mortgages. The retained mortgage portfolios would be spun off to the gses’ shareholders, thereby respecting the shareholders’ ownership rights. The mimp plan appears superior to other possible solutions, including a public utility model and covered bonds.