Cut Loose the Mortgage Giants

The world's largest home- mortgage companies, Fannie Mae and Freddie Mac, enjoy what amounts to an unfair advantage over the nation's private banks competing for the same business.

As government-sponsored enterprises, both Fan and Fred have what amounts to a symbolic credit line of $2.25 billion with the US Treasury. That allows them to borrow at rates lower than competitors.

And because Congress chartered the companies to help low-income Americans obtain housing, and because they have combined assets of $3.1 trillion, investors assume the government would not allow them to fail - even though the government is under no obligation to pay investors in case of a default.

Last week, the Federal Reserve released a study by one of its economists showing that government backing of Fan and Fred doesn't really boost homeownership. Rather, it said, the federal support mainly helps the companies' shareholders, because it indirectly boosts their bottom line.

In fact, the Fed study finds the support is worth between $119 billion and $164 billion. After taxes, homeowners receive $44 billion of that; Fan and Fred keep $72 billion. Further, the report finds that huge benefit lowered the cost of a home mortgage by only a minuscule 0.07 percent.

Those numbers suggest that all of Fan and Fred's government perks (they don't pay state or local taxes, for example) should be abolished.

The risk of the two giants faltering has grown in these post-Enron days. An accounting scandal recently revealed that Freddie Mac understated earnings by some $5 billion between 2000 and 2002, prompting the Bush administration to call for tougher regulation of Fan and Fred. But Congress has been slow to act because of the giants' extensive lobbying.

It's time to open up Fan and Fred for closer scrutiny and cut their ties to the Treasury - for the sake of their investors and the good of American taxpayers.