Housing Enterprises:

Potential Impacts of Severing Government Sponsorship

GGD-96-120: Published: May 13, 1996. Publicly Released: May 13, 1996.

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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).

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.

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