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AEI resident fellow Alex J. Pollock makes the point that the recently passed Dodd-Frank financial reform bill does little to address problems created by mortgage giants Fannie Mae and Freddie Mac and their reliance on the federal government to cover billions of dollars in losses. The answer? Pollock says a private secondary market for prime, conforming mortgages is the best option. He writes: "The future mortgage finance system should have a robust private secondary market for the largest segment of the business: prime, conforming mortgage loans. In this market, private investors should put private capital at risk, and prosper or lose as the case may be. This is the most obvious case where the risks are manageable and no taxpayer subsidies or taxpayer risk exposures are required or desirable." Peter Wallison, co-director of AEI's program on financial policy studies, has also made the case for privatization. In an AEI Financial Services Outlook, Wallison makes these points: -
Privatizing Fannie and Freddie is the best option as a matter of policy, but in the absence of alternatives, Congress is likely to take the path of least resistance and return the GSEs to their precrisis status quo. -
Still, once the securitization market is functioning again, Fannie and Freddie can be privatized by reducing the conforming loan limit over time. Articles on housing finance by Alex J. Pollock: Fan and Fred: What Would Andrew Jackson Do Lots of Regulatory Expansion but Little Reform Reform of the Housing Finance System What Should the New System Be Able to Do? Seven Steps Toward Sound Mortgage Finance Articles on housing finance by Peter J. Wallison: Fannie and Freddie Amnesia The Dead Shall Be Raised: The Future of Fannie and Freddie The Price for Fannie and Freddie Keeps Going Up Barney Frank, Predatory Lender The Future of the Mortgage Market and the Housing Enterprises Crisis and Ideology: The Administration's Financial Reform Legislation Photo Credit: iStockphoto/Andy Dean
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