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Reregulating Fannie Mae and Freddie Mac

Abstract

This paper offers a framework and a specific proposal for the reregulation of Fannie Mae and Freddie Mac (hereafter F&F) in the aftermath of the subprime mortgage crisis and their conservatorship. Reforming financial regulations after a major financial crisis is the norm in US financial history, and a process with generally very positive results. Actions to reregulate have typically solved the problem at hand, while maintaining an overall efficient and innovative financial system. In this spirit, this paper develops a framework and analyses alternative proposals for the reregulation of F&F, and recommends one specific plan. The recommended plan continues the firms’ mortgage guarantee and securitization programs in support of middle-income borrowers. The programs, however, would now operate within government agencies, in a format parallel to the current Federal Housing Administration (FHA) and GNMA programs that support lower-income borrowers. At the same time, the remaining net assets and technology of the F&F retained mortgage portfolios are to be returned to the firms’ investors, who would operate the new entities as private firms with no government connection.

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