Chapter 8

Freddie Mac Serves Enduring Public Purposes

Some critics assert that Freddie Mac and Fannie Mae have fulfilled their public mission and, thus, are no longer needed to ensure the smooth functioning of the mortgage market. Others state that the companies have completed a hypothetical “life cycle.” To the contrary, as dynamic and innovative companies, Freddie Mac and Fannie Mae are vital to America’s housing finance system. Together they save homeowners $10 billion each year in mortgage interest costs and reduce housing costs for many renters. They enable lenders to offer borrowers a range of mortgage products, including low-down-payment fixed-rate loans without government insurance. In addition, they reduce the variability in mortgage rates across the country and ensure a stable supply of fixed-rate mortgages throughout the business cycle.

Charter repeal would eliminate benefits enjoyed by homeowners and renters and jeopardize the best housing finance system in the world. As a post-repeal housing finance system began to resemble the current jumbo market, the stable supply of low-cost mortgages that Freddie Mac and Fannie Mae provide would disappear. Instead, mortgage rates would rise and vary more across the country, and homeownership would be postponed or denied for one million families.

Each year the two companies continue to serve enduring public policy objectives. Retaining the charters ensures continued benefits to American families at no cost to taxpayers.

A. Preconditions for Charter Repeal Are Inapplicable

In December 1995, OMB outlined guidelines for determining the desirability of repealing the charter for entities such as Freddie Mac and Fannie Mae.1 The three preconditions are:

• Assigned functions are no longer necessary or appropriate for federal involvement.
  
• Business conditions that prompted their creation have changed.
  
• The entity is no longer the most efficient way to achieve the public purpose.
  

Freddie Mac and Fannie Mae do not meet any of these preconditions.

1. Functions Are Still Necessary and Appropriate

Freddie Mac’s and Fannie Mae’s innovations and efforts to standardize the mortgage process continue to benefit homebuyers. The companies continually refine underwriting guidelines and procedures in response to changing market and consumer needs. Freddie Mac’s introduction of automated underwriting in 1995 demonstrates that the corporations continue to invest in dramatic innovation that reduces cost, improves underwriting and expands the market to new borrowers.

Expanding homeownership opportunities continues to be an important government objective. HUD is working together with industry organizations, including Freddie Mac and Fannie Mae, to achieve an all-time high homeownership rate of 67.5 percent by the year 2000. Congress also indicated its continued support for expanding housing opportunities by setting ambitious mortgage purchase goals for Freddie Mac and Fannie Mae that seek to promote affordable housing for low- and moderate-income families and families residing in underserved areas.

Repealing the charters of Freddie Mac and Fannie Mae would undermine these efforts. The resulting rise in mortgage rates would put homeownership out of reach for many first-time homebuyers and low- and moderate-income and minority families. Thus, Freddie Mac and Fannie Mae continue to play a necessary and appropriate role in the provision of low-cost mortgage credit.

2. Systemic Weaknesses Remain

Despite the evolution of the secondary mortgage market, some aspects of financing homeownership remain as challenging today as they were 25 years ago. These challenges are evident in the jumbo market, which is characterized by higher and more variable rates and the reduced availability of fixed-rate mortgages.

Freddie Mac was not created to fix a transient market imperfection that has since disappeared. Rather, Congress directed Freddie Mac and Fannie Mae to address the systemic weaknesses arising from the idiosyncratic nature of mortgages--which makes liquidity an ongoing challenge. While other sectors of the mortgage market now benefit from the presence of Freddie Mac and Fannie Mae, those benefits would not remain after charter repeal. Instead, there would be a return to higher mortgage rates and regional disparities in the availability and cost of mortgage credit. As long as there are business cycles, there will be a need for the stable supply of mortgage funds provided by Freddie Mac and Fannie Mae.

3. Lack of More Efficient Alternatives

The U.S. housing finance system is the most efficient and stable system in the world. As a result of intense competitive pressures within the secondary market and the virtual integration of mortgage and global capital markets, the housing finance system delivers a stable supply of low-cost mortgages to a broad group of mortgage borrowers.

Repealing the charters of Freddie Mac and Fannie Mae would not result in a purely private--or more efficient--mortgage market. In contrast, charter repeal likely would cause mortgage debt to shift to sectors of the market explicitly supported by the government, such as FHA and federally insured depositories. Further, the efficiencies of scale and scope--successfully captured by Freddie Mac and Fannie Mae and passed along to homeowners--would be diminished by repealing the charters.

B. Maintaining the Charters Ensures Continued Benefits

Every day, Freddie Mac helps ensure that a stable supply of low-cost mortgages is available for families in every type of neighborhood all across America. Lower mortgage rates reduce housing costs for both owners and renters and contribute to higher homeownership rates. Stable mortgage flows help moderate cyclical swings in the housing market, which in turn stabilize broader business-cycle activity. These substantial public benefits come at no cost to taxpayers.

The combination of congressional charter, public purpose and private capital ensures these continued benefits:

• Private-market incentives and national diversification make the housing finance system efficient. Significant private capital and appropriate government regulation make it safe.
  

• The public purpose required by the charters ensures that the two corporations maintain a constant and exclusive focus on supporting the residential housing market.
  

• The tools provided by the charters are essential to Freddie Mac’s and Fannie Mae’s ability to accomplish this public purpose.
  

Homeowners are the direct beneficiaries of this ingenious combination. Whether they buy a condominium in an urban area or a ranch home in a rural county, borrowers have access to mortgage funds that are about one-half of a percentage point lower than they otherwise would be.

Whether they are first-time homebuyers struggling to save funds for a down payment or middle-aged homeowners tapping the equity in their homes for college tuition, borrowers can readily find a mortgage product suited to their needs.

Whether they are minority or low-income families, borrowers have greater access to homeownership.

Whether they finance a home during a regional downturn in New England or a boom-period in the Sunbelt, borrowers know that mortgage money is available, and they will pay nearly identical rates.

Freddie Mac and Fannie Mae are congressional success stories. Removing the charters would hurt homebuyers and taxpayers. Removing the charters would jeopardize the best housing finance system in the world.

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