Competition for Fannie Mae and Freddie Mac?

The accounting scandal at Freddie Mac and increased interest rate risk exposure at Fannie Mae generated considerable headlines for the two giant housing GSEs over the past two years. Less widely recognized are two emerging and potentially powerful sources of new competition for Fannie Mae and Freddie Mac: an expanded mortgage finance program by the Federal Home Loan Bank System and new bank risk-based capital standards that are likely to be implemented in 2006. This heightened competition could create incentives for Fannie Mae and Freddie Mac to take greater risks, with potentially unfavorable consequences for U.S. taxpayers. As a result, unless the two firms were to be privatized quickly (which is highly unlikely), enhanced regulatory scrutiny will be in order