NEWS ANALYSIS

JANUARY 10, 2001
CONTACT: corprel@freddiemac.com
or (703) 903-3933

FREDDIE MAC AND FANNIE MAE:
THEIR FUNDING ADVANTAGE AND BENEFITS TO CONSUMERS

Executive Summary

The benefits that American consumers derive from the activities of Freddie Mac and Fannie Mae and the advantages these private corporations receive from their federal charters are central issues in the public discussion of their role in the housing finance system. At the request of Freddie Mac, we independently analyzed a 1996 report that the Congressional Budget Office prepared on this subject (the “1996 Study”) and then addressed the benefits to consumers and to the corporations.

• We first find that the 1996 Study both understated the consumer benefits and overstated the firms’ advantage in borrowing funds (the “funding advantage”). The study used faulty data and inappropriate methodology.

• We estimate that Freddie Mac and Fannie Mae generate interest-cost savings for American consumers ranging from at least $8.4 billion to $23.5 billion per year. In contrast, we estimate that the value Freddie Mac and Fannie Mae indirectly receive from federal sponsorship in the form of their funding advantage ranges from $2.3 billion to $7.0 billion annually. Thus, even using the lowest estimate of consumer benefits and the highest estimate of the funding advantage in our range of estimates, the value of consumer interest-cost savings resulting from Freddie Mac and Fannie Mae’s activities significantly exceeds the value of their funding advantage.

  • Freddie Mac and Fannie Mae also provide benefits beyond those that can be quantified in terms of savings on mortgage interest expense by homeowners. These include the maintenance of liquidity in the mortgage market during periods of financial turbulence and the expansion of homeownership opportunities for low-income and minority families. No attempt to quantify these additional consumer benefits was made here.

• We also find that federal sponsorship of Freddie Mac and Fannie Mae provides a “second best” structure for a housing finance system assuming that the “first best” system would have no government involvement at all. This is because Freddie Mac and Fannie Mae supply housing finance more efficiently than could the depositories alone. Banks and thrifts receive federal support in the form of deposit insurance, access to Federal Reserve Bank liquidity, and Federal Home Loan Bank advances and as a result they have an average cost of funds lower than Freddie Mac and Fannie Mae.

In summary, the 1996 Study was deficient in many respects. A more accurate approach shows that, under current federal sponsorship of Freddie Mac and Fannie Mae, consumers receive benefits significantly greater than the funding advantage received by the two corporations.

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to support homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. Over the years, Freddie Mac has opened doors for one in six homebuyers and more than two million renters in America.

The complete Pearce/Miller Study [PDF 142K] is available here in PDF format. An earlier study by James Miller, An Efficiency Analysis of Eliminating Freddie Mac's and Fannie Mae's Charters, is also available here in PDF format.