Residential Mortgages and Public Policy: What to do with Fannie and Freddie?

The current debate on U.S. housing policy focuses on the role of the government in supporting the mortgage market. Existing organizations (Fannie Mae/Freddie Mac) are in conservatorship status, and Congress is considering alternative structures and guarantees including the Johnson-Crapo bill, to provide catastrophic insurance in support of the coverage from private companies. The resolution of this issue is complicated by the various activities involved in the issue-investment securities, public policy, macroeconomics, accounting, and insurance. This article reviews the impact of these activities on U.S. housing, with a discussion of the feasibility of creating a catastrophic insurance program similar to that of the Federal Deposit Insurance Corporation. The federal government has successfully operated catastrophic insurance programs in support of private sector initiatives, and this experience-while certainly not perfect-may be a reasonable approach to the current Fannie/Freddie dilemma.