Ever since their near collapse during the 2008 financial crisis, the mortgage giants Fannie Mae and Freddie Mac have performed impressively under the conservatorship of the US government. They’ve returned more than $300 billion to the Treasury, far exceeding the $191 billion in taxpayer funds once needed to bail them out. They make homeownership easier for millions of Americans, guaranteeing about 40% of all single-family home loans and keeping credit flowing even through recessions.
White House officials are looking to change this arrangement, as investors clamor for a piece of what has proved to be a lucrative business. They should leave well enough alone.
With almost $8 trillion in combined assets, Fannie and Freddie are foundational to the US housing market. Without them, the traditional 30-year, fixed-rate mortgage wouldn’t exist. Yet for decades they operated as a flawed hybrid — private in the sense that they sought to maximize value for shareholders, public in the sense that markets assumed the government would rescue them in an emergency. This allowed them to borrow cheaply, take on big risks and generate ample profits, until catastrophic losses amid the subprime-mortgage bust forced the government to step in.
Since then, under the conservatorship, Fannie and Freddie have transformed themselves — in ways that protect taxpayers, harness private capital and improve housing finance more broadly. They’ve sold off toxic assets and increased guarantee fees. They’ve shifted much of the risk of losses to outside investors via novel transactions. They’ve created a common securitization platform to make their mortgage-backed bonds as uniform and easily tradable as possible. To an admirable extent, they’ve become a public utility ensuring the efficient flow of the world’s savings to US borrowers.
Despite these achievements, people keep insisting that the government needs to let Fannie and Freddie go. Ambitious reform legislation has been proposed and abandoned. The president has said he’s giving “very serious consideration” to a re-privatization, though what that would entail remains unclear. Others are agitating for an approach that would restore something very similar to the pre-2008 hybrid arrangement while enriching holders of the enterprises’ vestigial common stock. The share price has jumped on hopes that such a proposal might succeed.
It’s hard to see how any of these initiatives would improve on the status quo. History has demonstrated that the government can’t fully extract itself from enterprises so crucial to the housing market and the broader economy. There’s no amount of equity capital that would be both acceptable to private investors and large enough to eliminate the expectation of public support in a crisis. Even a well-considered reform plan, should one emerge, would risk destabilizing the mortgage market and driving up borrowing costs.
For nearly two decades, Fannie and Freddie have proved that they can operate well under the government’s control. They’ve made ample progress toward the goals that any reasonable reform would set. Why try to fix what isn’t broken?
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