Fisher Center for Real Estate and Urban Economics

This paper considers three sets of possible solutions for the future role of Fannie Mae and Freddie Mac within the U.S. mortgage markets: reestablishment as government sponsored enterprises (GSEs), transfer of key activities to the government, and privatization. The two firms have now operated as GSEs for decades without significantly mitigating any market failures, while their risk-taking ultimately led to a government bailout and conservatorship. I conclude that a GSE format, combining a public mission with private incentives to take risks, is basically untenable. My proposal, therefore, is a combination of a government agency and privatization. The government agency would, at least temporarily, take over the core GSE activity of securitizing prime, conforming, mortgages. The privatization would transfer any remaining net assets and any intellectual proper to the firms’ shareholders, with the firms then being reorganized as private sector entities with no further links to the U.S. government. The ultimate goal is for the private markets to take over all mortgage securitization.