The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are retaining about $2 billion annually in benefits from federal sponsorship, according to a new Congressional Budget Office (CBO) study, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac. If those benefits were passed through to home buyers, mortgage interest rates would be lower and home ownership rates would be higher. Alternatively, the government might direct some of those retained resources to targeted housing programs, deficit reduction, lower taxes, or other fiscal needs.
CBO estimates that federal sponsorship of those enterprises provides them with a subsidy of $6.5 billion per year in reduced funding costs. Fannie Mae and Freddie Mac appear to pass along to borrowers about $4.4 billion a year in lower mortgage interest rates. Federal law also exempts the government-sponsored enterprises (GSEs) from state and local income taxes as well as Securities and Exchange Commission registration fees. Those exemptions save the enterprises an additional $500 million a year.
The ability of the sponsored enterprises to hold on to some of the federal subsidy intended for home buyers is the result of limited competition in the secondary market for conforming mortgages (first-quality loans with an annually adjusted ceiling on the principal amount, currently $207,000 for single-family homes). Fannie Mae and Freddie Mac are able to dominate that market because they are the exclusive recipients of the benefits of GSE status. The close alignment of management and shareholder interests means that they have an incentive not to pass on the entire benefit of federal sponsorship to home buyers.
Sudden repeal of the federal charters of Fannie Mae and Freddie Mac and complete privatization could produce a temporary shock to the mortgage finance system and increase mortgage interest rates. Several other policy options are available to the Congress that move toward privatization and that have the potential to improve the balance of public costs and benefits from the operations of the housing GSEs. Those options include restricting the enterprises to issuing mortgage-backed securities (MBSs), which is their least subsidized line of business; auctioning federal guarantees of MBSs; lowering the ceiling on conforming mortgages, which now covers more than 90 percent of all single-family, conventional mortgages; and levying a cost-of-capital equalization fee on debt issued by Fannie Mae and Freddie Mac.