WASHINGTON — Fannie Mae and Freddie Mac should be liquidated, the Shadow Financial Regulatory Committee has advised.
The committee is sponsored by the American Enterprise Institute, a Washington-based conservative think tank.
Arguing that policymakers should seize the conservatorship of the beleaguered mortgage giants as an opportunity to deal with the conflict that arises from a public mission combined with private ownership, the committee said there are three options for Fannie and Freddie after the housing market has stabilized: nationalization, privatization and liquidation.
The committee rejected nationalization of Fannie and Freddie as unnecessary because the private sector is fully capable of providing a more efficient means of mortgage financing, it said.
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Privatization could be sensible, the committee said, but was concerned that Fannie and Freddie could be seen as being too big to fail. Together the two entities hold or guarantee half of the nation's mortgage debt. Privatizing as smaller organizations would not prevent them from recombining in the future, the committee argued.
Liquidation is the most promising course, the committee concluded. "It allows taxpayers (and shareholders if the companies return to profitability) to benefit from whatever value remains in the companies, but minimizes the risk of continuing government involvement with their activities," the committee said.
The committee said it started warning in 1990 that Fannie and Freddie were creating "substantial and growing risks" for taxpayers and the economy.
But Daniel Green, executive vice president of strategy at Washington state-based Prime Alliance Solutions Inc., disagreed with the dire assessment of the government-sponsored enterprises. "We need Fannie and Freddie," he said in a telephone interview, adding that they have met their mission of providing a constant source of affordable finance for mortgage lending and that Fannie and Freddie have made the movement of mortgage loans easier by standardizing mortgage lending.
The private markets could take over from Fannie and Freddie but would probably do so at a higher price, Green said.
In a statement e-mailed to Credit Union Times Boeing Employees' Credit Union said, "Fannie Mae and Freddie Mac share a mission similar to our own. We both exist to ensure members have access to affordable credit for the purchase of a home. Both Freddie and Fannie are important partners as we help members realize the American dream. Without the GSEs it will be much harder for credit unions to fulfill their mission, and members their dream."
Bob Dorsa, president of the American Credit Union Mortgage Association, said that any action undertaken should be made using a very pragmatic approach. Dorsa asked: If Fannie and Freddie are liquidated, then what is the secondary market going to look like? How is it going to work?
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