Two Options for GSEs Get Single Bad Grade; GAO: Privatization, Publicutility Ideas Are Unworkable

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Byline: Steven Sloan

WASHINGTON - The Government Accountability Office entered into the debate over the future of Fannie Mae and Freddie Mac on Thursday, blistering some of the most widely discussed options for revamping the government-sponsored enterprises.

Though the watchdog agency did not take a formal position on what policymakers should do with the enterprises, it essentially declared two ideas unworkable - fully privatizing the GSEs or turning them into public utilities. Those options could spur inefficiencies, raise mortgage rates and take banks out of the business of offering traditional mortgages, the GAO concluded.

The report offered detailed pros and cons of other options including nationalizing Fannie and Freddie, simply restoring the firms to their previous status, breaking them up into multiple entities or turning them into cooperatives.

In the year since the federal government seized the GSEs, options for how to deal with them have multiplied, even though the Obama administration has said it will not deal with the issue until 2010. The 73-page report by the GAO, which undertook the analysis independent from a lawmaker request, could play a critical role in shaping the debate.

While many Republicans and other conservatives have pushed for years to privatize the GSEs or eliminate them, the GAO found only one benefit to such an approach: enhanced market discipline. But the agency warned that it was not clear if privatized GSEs could support the mortgage market during a crisis. The report also indicated it would represent a radical shift to the market, one with potentially harmful consequences.

"Lenders might be less willing to originate 30-year, fixed-rate mortgages, due to the associated interestrate risk of holding them in portfolio," according to the report. "Additionally, privatization or termination could result in a relative increase in mortgage rates, because private sector lenders might not have the funding advantages that the enterprises derived from their federal sponsorship over the years."

The GAO was also critical of a relatively new concept promoted in January by then-Treasury Secretary Henry Paulson: turn the GSEs into public utilities. The report found no benefit to such an approach and cited a serious flaw.

"It is not clear that the public utility model is an appropriate regulatory structure because, unlike natural monopolies such as electric utilities, the enterprises have faced significant competition from other providers of mortgage credit over the years," the report said. …