Say Goodbye to Fannie and Freddie | William Poole | Cato Institute: Commentary

Say Goodbye to Fannie and Freddie | William Poole | Cato Institute: Commentary: "What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies' executives."

"Can the home mortgage market stand on its own, without support from federally sponsored mortgage companies? Experience tells us that the answer is an unambiguous yes. When Fannie and Freddie curtailed their operations after the disclosure of accounting irregularities in 2003, there was no effect on mortgage rates. We have seen how the jumbo mortgage market, for loans too large to be eligible for Fannie and Freddie purchases, has long operated efficiently, with rates only slightly above the rates on smaller mortgages. And many other asset markets, like the one for securitized auto loans, have functioned well without federal intermediaries."

"In principle, it ought to be possible for government financial agencies to be self-supporting. But decades of observation have convinced me that there is no practical way to prevent the government from inserting hidden subsidies and special interest mandates into the agencies' operations. If there are to be more federal housing subsidies — and I hope there are not — they should be legislated transparently."

"Fannie and Freddie could not be shuttered immediately; they are too large. A sensible transition plan would have them stop buying new mortgages, and their portfolios would decline as the mortgages they own are paid down. Within 10 years, the portfolios would shrink to insignificance.

Their securitization business, whereby they purchase mortgages and issue securities against them, should likewise be wound down. A practical approach would be to set a gradually rising schedule of fees, motivating private companies to enter the securitization business.

In 10 or 15 years, the companies would be gone, closing a chapter in American financial history that enjoyed considerable success but ended very badly and at great taxpayer cost."