Proposals to privatize Fannie Mae, Freddie Mac and the Federal Home Loan Banks are not new. Less than 10 years ago, the Department of Housing and Urban Development commissioned an extensive study of the privatization of Fannie Mae and Freddie Mac, and produced a useful collection of essays on the many difficult questions such a proposal raises.
This AEI project is different from the HUD study, which drew no conclusions and did not result in the preparation of legislation. In this case, we will assume that the privatization of the housing GSEs is good policy and deserves to be carefully considered by Congress as an alternative to tighter regulation. This reflects what I think are the conclusions of many independent observers of the housing finance market today, and seems to be a view that is especially strongly held by financial regulators and former financial officials of both Democratic and Republican administrations. The housing GSEs have simply grown too big, too risky, and too politically powerful to be effectively regulated or to be allowed to continue on their current course.
This conclusion-almost a consensus-is not of course reflected in Congress. There, at least at this point, the political power of the housing GSEs has prevented any serious debate on the issue of privatization. Most lawmakers seem to believe that it would be difficult enough to achieve some modest degree of additional regulation; privatization is simply not now within the art of the possible. Things can change, however, and often do. Congress-as happened with the Sarbanes-Oxley legislation-can be swept by a frenzy for action, and this could happen if there is one more serious example of regulatory failure, or a significant financial problem at either Fannie or Freddie.
As my grandfather used to say, "When it rains soup it’s good to have a spoon," and on that timeless principle it seems sensible to prepare the ground for serious consideration of privatization, even though the idea is not now on anyone’s agenda on the Hill. The purpose of this study, then, is to clear away as many of the technical obstacles to privatization as possible, so that if privatization ever becomes politically feasible it will not be set aside because of uncertainty about how to accomplish it. We intend to create a road map, including the necessary legislation, so that when some lawmaker decides to explore the idea there is already a fully worked out proposal available.
What should any such proposal entail? For one thing it should result in a fully competitive, seamless market, with no participant having a financial advantage over any other and with no artificial or government-created barriers to entry into any of the submarkets of the residential mortgage market. In addition, it should have the least possible impact on the housing market, so that congressional sponsors can assure their colleagues that the mortgage market will continue to function and consumers will not notice a difference between the prices and services they receive today and those they will receive in the competitive market that privatization will create. In order to come as close as we can to these standards, the plan will be reviewed by economists and other market specialists before being put in final form. That review will come later, at a conference like this, but both proposals we will discuss today were designed with these goals in mind.
Finally, we hope that at the end of this project we will have a fully drafted legislative proposal, ready for introduction into the House and Senate by one or more lawmakers who are interested in stimulating debate about privatization. In electoral politics you can’t beat someone with no one, and in a public policy debate it is very difficult to attract serious interest to a proposal unless the details have been worked out at least to some degree and the most obvious political and practical obstacles addressed.
That is what we will attempt to do in this project, and to the extent that your criticism assists in the improvement of the two proposals we will discuss today you will have the satisfaction of knowing that you contributed to a worthwhile effort.