Think tank urges Fannie, Freddie liquidation

Fannie Mae and Freddie Mac should be liquidated.

That is the consensus of a group of academics who follow financial regulatory issues for the American Enterprise Institute for Public Policy Research.

The group, known as the Shadow Financial Regulatory Committee, came to that conclusion in a policy pronouncement issued last Monday.

Fannie Mae of Washington and Freddie Mac of McLean, Va., government-sponsored enterprises that are stockholder-owned, are the leading participants in the secondary-mortgage market, guaranteeing about half the $12 trillion U.S. mortgage market.

On Sept. 7, the Federal Housing Finance Agency took over Fannie Mae and Freddie Mac as the housing market deteriorated and the companies’ financial positions worsened.

In announcing the move to put the two companies into conservatorship, FHFA director James Lockhart described the action as “a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations.”

“We now have what are explicitly [taxpayer-]guaranteed organizations that are going to be — if they are returned to their initial status … shareholder-owned,” said Peter Wallison, a resident scholar with the AEI, a free-market-oriented think tank in Washington. That would be very unusual in the U.S. economy, he said.

“We looked at the three possible alternatives that we thought were rational — that is, nationalization, privatization and liquidation — and came to the conclusion that liquidation was the most logical outcome,” Mr. Wallison said.

Congress could choose to nationalize the entities in order to subsidize affordable housing, he said. But aid to affordable housing could be done much more efficiently than the way Fannie and Freddie do it, Mr. Wallison said.

He offered as an example Australia’s system of providing direct down payments to first-time homebuyers, who then negotiate mortgage financing in the commercial market.

Privatization would return to taxpayers some of the costs borne in the bailout, the committee, which makes periodic policy recommendations on a wide range of financial industry issues, said in a paper issued on the proposal. But if the companies are privatized in their current form, they will likely continue to be viewed as being backed by the government and too big to fail.

If the companies are broken down into separate entities, that will reduce their value to stockholders, the committee report said.

Further, the companies could recombine in the future, it said.

That leaves liquidation as the soundest alternative, Mr. Wallison said.

When the housing market has been stabilized and other sources of finance are available, a liquidation could be accomplished, he said.

However, Mr. Wallison added, “this is going to take years.”

Liquidation would allow taxpayers and possibly shareholders to benefit from whatever value remained in the companies, but would minimize the risk of continuing government involvement in their activities, the report said.

The AEI and other free-market advocates have called for tighter controls over Fannie Mae and Freddie Mac for about 20 years, arguing that the two institutions have been creating growing risks for the economy and taxpayers.

But the organizations have had the clout in Congress to thwart any attempts to rein them in.

“Fannie Mae and Freddie Mac have been the linchpins of the American housing finance system for decades, and their core functions of providing liquidity and stability are ones that we will continue to need in the future,” Steve O’Connor, senior vice president of government affairs for the Mortgage Bankers Association of America in Washington, wrote in an e-mail.

“The suggestion that [Fannie and Freddie] be liquidated is one option that some policymakers and thought leaders have embraced. There are other options that will rightfully be examined as well,” Mr. O’Connor wrote.

“We look forward to a robust debate on all the potential outcomes for Fannie Mae and Freddie Mac.”

The FHFA declined to comment about the AEI committee’s suggestion.

E-mail Sara Hansard at [email protected].