Housing Enterprises: Potential Impacts of Severing Government Sponsorship

GAO discussed the potential effects of privatizing the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Freddie Mac). GAO noted that: (1) the privatization of Fannie Mae and Freddie Mac would have a major impact on both the secondary and primary mortgage markets; (2) if the implied federal guarantee on mortgage-backed securities and debt were eliminated or reduced, the two government sponsored enterprises' (GSE) borrowing costs could increase from 30 to 106 basis points; (3) the significant risks and costs of continued federal sponsorship include potential taxpayer liability totalling $1.4 trillion in enterprise obligations, underinvestment in other economic sectors, and limited competition in the secondary mortgage market; (4) privatizing GSE would eliminate GSE funding advantages and tax and registration exemptions, increase operating costs, increase other business opportunities in the secondary mortgage market, and decrease their profits, stock values, and market shares; (5) privatization could prevent regional disparities in the securities market; (6) privatization would require GSE to be more dependent on their strategic business decisions and total quality management; (7) the potential effects of privatization on homebuyers includes a decrease in taxpayers' risk exposure to enterprise obligations and an increase in interest rates of about 15 to 35 basis points; and (8) alternative initiatives such as imposing a mortgage fee should be studied to limit the level of taxpayers' risk.