	Introduction

The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac)(referred to in this report jointly as the enterprises) are government-sponsored enterprises that play important roles in federal support of home ownership and America’s housing finance system. They earn profits primarily from two sources. Ginnie Mae and Fannie Mae operated differently. (See table 1.5.) On the other hand, if the markets’ perception about the implied guarantee does not change, or changes very little, the effect of privatization on the enterprises’ costs would be limited largely to expenses related to SEC registration requirements and state and local corporate income taxes. Privatization Would Eliminate Direct Benefits

Privatization would eliminate the direct benefits conveyed by the enterprises’ federal charters. However, using the Federal Reserve could make enterprise securities more liquid and convenient investments than they would be otherwise. We have concluded, however, that if the enterprises were fully privatized and the perceived guarantee were reduced or eliminated, their funding costs would increase for both MBS and debt. 2). In addition, their cost advantages may have sheltered them from potential competitors in the secondary market. They did not, however, predict the potential impact of reduced liquidity on mortgage interest rates. Freddie Mac officials said that mortgage rates would increase by more than 15 to 35 basis points; in fact, they predicted an increase of 55 to 86 basis points. 3). Transition Issues and Alternative Policy Options

Privatization of the enterprises would clearly be a major policy change. Generally, the larger the new enterprises are, the greater the risks that investors would continue to perceive an implicit federal guarantee, because the enterprises could be considered too big to fail and there would be increased potential cost to taxpayers if the enterprises were rescued by the government; and the enterprises, because of their size and the possible remaining perception of an implicit federal guarantee, would exercise market power in business activities outside of the secondary mortgage market for conventional, conforming residential mortgages. User fees on the enterprises could help level the playing field between the enterprises and private-label conduits and motivate these conduits to securitize conforming mortgages, because the cost of funds differential would be reduced.
Why GAO Did This Study

Pursuant to a legislative requirement and a congressional request, GAO examined the potential effects of privatizing the Federal National Mortgage Association (Fannie Mae) and the Federal National Mortgage Association (Freddie Mac).

What GAO Found

GAO noted that: (1) the privatization of Fannie Mae and Freddie Mac would have a major impact on both the secondary and primary mortgage markets; (2) if the two government-sponsored enterprises lost the benefits of their federal charter, their costs would increase because they would be responsible for paying Securities and Exchange Commission registration fees on their securities or state and local taxes; (3) by eliminating or reducing the implied federal guarantee on mortgage-backed securities (MBS) and debt, the enterprises' borrowing costs would increase from 30 to 106 basis points if the perceived federal guarantee were completely eliminated; (4) these increased costs would be passed to the homebuyer and the average mortgage interest rate would increase by 15 to 35 basis points; (5) eliminating the cost advantages of federal sponsorship could spur more competition and retain liquidity in the secondary market because firms would find it profitable to purchase and securitize conforming mortgages; (6) privatization could stabilize the securities market and prevent it from experiencing regional disparity; (7) privatization would pose an adverse threat to the enterprises' financial performance because they would be more dependent on their strategic business decisions and total quality management; (8) low and moderate-income borrowers would be most impacted by the enterprises' privatization because the federal programs providing credit to these groups would be eliminated; and (9) alternative initiatives should be studied to limit the risk to taxpayers.