Reining in Fannie Mae and Freddie Mac

Revelations of accounting irregularities and excessive risk-taking by the home mortgage giants Fannie Mae and Freddie Mac have led to calls for various reforms, in order to protect taxpayers who would likely have to pay the costs if one or both of the firms were to become insolvent. The various reform proposals each have some unique appeal: Limits on the size of the portfolio of mortgages retained by Fannie and Freddie would result in private investors once again shouldering the mortgage risk instead of the taxpayers. Requiring Fannie and Freddie to fully hedge their risks with callable bonds would likewise shift that risk to private investors. And requiring Fannie and Freddie to pay risk-offsetting user fees would likely lead the firms to accept full privatization, again taking taxpayers off the hook. Given the serious risks posed by Fannie and Freddie, policymakers would do well to adopt one of these proposals