Today, the Government Accountability Office (GAO) released a report entitled, “Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-term Structures.” Last September, the Federal Housing Finance Agency placed the GSEs into conservatorship fearing that their deterioration would harm U.S. financial stability. Since being placed in conservatorship, several proposals have been suggested as to how the GSEs should be restructured. In part, today’s report criticized the proposals for restructuring the GSEs. Those proposals include:

  • reconstituting the GSEs as for-profit corporations with government sponsorship but place additional restrictions on them to minimize risks;
  • establishing the GSEs as government corporations or agencies that would focus on purchasing qualifying mortgages and issuing mortgage backed securities but eliminate their mortgage portfolios ; and
  • abolishing the GSEs in their current form and disperse mortgage lending and risk management throughout the private sector.

In response to the proposal that would revamp the GSEs into for-profit corporations with government sponsorship, the report concluded that, “[c]ontinuing the enterprises as GSEs could present significant safety and soundness concerns as well as systemic risks to the financial system.” It went on to state, “[i]n particular, the potential that the enterprises would enjoy explicit federal guarantees of their financial obligations, rather than the implied guarantees of the past, might serve as incentives for them to engage in risky business practices to meet profitability objectives.” The GAO also feared that “[i]nvestors might be unwilling to invest capital in reconstituted enterprise unless the Treasury assumes responsibility for the losses incurred during their conservatorship.” The report stated that the GSEs might “face challenges retaining capable staff or become overly bureaucratic and unreceptive to market developments” if established as government corporations. Lastly, the GAO was concerned that, given the substantial financial assistance while in conservatorship, it would be difficult to “credibly privatize” the GSEs. The report found that, “the financial markets likely would continue to perceive that the federal government would provide substantial financial support to the enterprises, if privatized as largely intact entities, in a financial emergency.”