Privatize Fannie Mae

The recent accounting scandal at Fannie Mae, the government-sponsored housing enterprise, stands as a compelling reason why Congress should privatize both Fannie and its cousin, Freddie Mac.

The nation's financial markets can't afford another scandal that, next time, might bring down these two mortgage industry giants. The Securities and Exchange Commission found Fannie Mae had altered its books to avoid reporting $9 billion in losses over the past four years. (Freddie's own accounting scandal in 2003 forced it to oust four top executives and pay $125 million in fines after it didn't report $5 billion in profits.)

Fannie and Freddie together hold or guarantee about half of the nation's $8 trillion in residential mortgages. Should they lose the markets' trust and collapse, taxpayers could be forced to pick up the tab. Given their size, the fallout would make the Enron scandal and the savings-and-loan crisis of the 1980s look mighty small.

Both companies hold an unfair advantage over other lenders in the form of an implicit guarantee in a line of credit from the Treasury Department. That allows them to borrow at cheaper rates than their competitors. They're also exempt from state and local taxes.

But those crutches are no longer needed. Fan and Fred long have expanded beyond their original mission, set after the Great Depression, which was to help poorer Americans buy homes. To their own credit, they have shown other banks that low-income families aren't necessarily bad credit risks. It's time for both companies to get on a level playing field with the banks as private institutions serving their stockholders alone.

They should no longer cling to an outgrown public mission with its attendant government perks - a mission that indeed works at cross-purposes with serving the shareholder's bottom line. Federal Reserve chair Alan Greenspan has said Fannie and Freddie present a "systemic risk" to the nation's finance system, and has called for their privatization.

Credible studies show that Fannie and Freddie aren't buying as many mortgages of low-income borrowers as even banks are making. Peter Wallison of the American Enterprise Institute maintains "banks are making more mortgage loans to low income and minority borrowers than Fannie and Freddie have been willing to buy from them." A study done for the Department of Housing and Urban Development by Richard Williams, a professor at Notre Dame, corroborates Mr. Wallison's claim, saying Fannie and Freddie "...do not purchase relatively more underserved [low-income] market loans than the primary market makes" - pretty clear evidence that their mission of helping the poor has largely been met by the private market.

Two weeks ago, Fannie's niece, Sallie Mae, the successful student loan institution, went private - nearly four years ahead of schedule. It will take work, and probably won't yield the enormous (and apparently sometimes false) profits Fan and Fred have seen to date, but ultimately both companies can, and should, do the same.