I wonder whether it would have made a difference if, instead of being allowed to grow so large, Fannie and Freddie had been forced by the government to split into, say, four corporations apiece. (Had they been purely private entities, the regulator otherwise might have required something approaching a 10% capital base.)
At least with an integrated bank, no matter how large, there are various bits of the business that could be sold off to competitors: brokerage, wealth management, merchant banking, capital markets, retail branch networks and so on. Who could take over Freddie and Fannie's monoline portfolios? Countrywide?
Anyway, I'm just thinking aloud.
: before I think aloud, I really should google
How to Privatize Fannie Mae and Freddie Mac
40th Annual Bank Structure Conference
Sponsored by the
Federal Reserve Bank of Chicago
May 7, 2004
This paper will address two complementary yet mutually independent proposals -- privatizing the three housing-related government-sponsored enterprises (GSEs) and authorizing banks and thrift institutions to own largely unregulated mortgage housing subsidiaries (MHS). MHS will enable banks and thrifts to retain the ownership of long-term, fixed-rate mortgages they have originated or purchased in a special-purpose subsidiary (an MHS) that will be funded in the capital markets, not by deposits.
The first section of the paper will outline the American housing finance problem. The paper's second section will explain the relatively straight-forward manner in which the three housing finance GSEs -- Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBs) -- can be fully privatized. The third section of the paper will describe the MHS concept, explain why it is a complement to fully privatizing the housing GSEs, and describe how, in many cases, it will produce lower "all-in"1 mortgage interest rates than Fannie Mae and Freddie Mac (F&F) can produce.
Despite appearances to the contrary, the American housing finance system is hardly the bastion of efficiency. It suffers from high mortgage transaction costs, an excessive reliance on the secondary mortgage market, inefficient funding mechanisms, and excessive taxpayer risk stemming largely from F&F's undercapitalization for the interest-rate risks they have assumed. The underlying causes of this inefficiency are a public policy tilt towards the secondary mortgage market, through the GSEs, and a companion public policy tilt against depository institutions holding mortgages in portfolio.
The solution to these underlying causes is relatively straight-forward and easy to implement -- privatize the three housing GSEs while authorizing the MHS concept, which will enable depository institutions to profitably and safely hold long-term, fixed-rate mortgages in portfolio, by selling the mortgages they originate to MHS they own and control. This proposal has moved to a crucial stage in public policy development -- legislation to implement both pieces of this proposal -- privatizing the GSEs and authorizing the MHS. With the AEI having sponsored the drafting of that legislation, the GSE privatization/MHS authorization proposal is now ready for implementation.
Given growing concerns about the systemic risk F&F pose, trumpeted by Chairman Greenspan in his February testimony to the Senate Banking Committee, this legislation has been drafted not a moment too soon.