The role of the Fannie Mae/Freddie Mac duopoly in the American housing market
| Pages | 336-348 |
| Date | 24 July 2009 |
| Published date | 24 July 2009 |
| DOI | https://doi.org/10.1108/13581980910972269 |
| Author | David Reiss |
| Subject Matter | Accounting & finance |
The role of the
Fannie Mae/Freddie Mac duopoly
in the American housing market
David Reiss
Brooklyn Law School, Brooklyn, New York, USA
Abstract
Purpose – The purpose of this paper is to provide a brief introduction to the role of the Fannie Mae/
Freddie Mac duopoly in the American housing market.
Design/methodology/approach – First, the paper defines the “government sponsored enterprise,”
which is the type of hybrid public/private entity that Fannie and Freddie are and provides an
introduction to the other significant government sponsored enterprises. It then explains what Fannie
and Freddie do in the American mortgage market and provides a brief history of how the two
companies developed. Finally, it evaluates the two companies as duopolists in the conforming
mortgage market.
Findings – The paper concludes by suggesting that the current financial crisis presents an
opportunity to rethink whether the Fannie/Freddie duopoly continues to serve the public interest.
Research limitations/implications – Because of its length, the paper does not review alternative
approaches to the status quo that the US Government can take to ensure that it has a stable federal
housing finance policy.
Practical implications – The paper argues that the current financial crisis provides an opportunity
to revisit the design of the structure of the US housing finance market.
Originality/value – The paper sets forth the rationale and legal basis for characterizing Fannie Mae
and Freddie Mac as duopolists.
Keywords United States of America,Mortgage companies, Housing, Government policy
Paper type Conceptual paper
The Federal National Mortgage Association (commonly known as “Fannie Mae”) and
the Federal Home Loan Mortgage Corporation (commonly known as “Freddie Mac”)
are two of the ten largest companies in the USA measured by assets[1]. While they are
for-profit, privately owned mortgage finance companies whose shares trade on the
New York Stock Exchange, they are also two of the few companies directly chartered
by congress[2]. Congress created them to develop a liquid national market for
residential mortgages in order to encourage homeownership[3]. The privileges
attendant to this special relationship with the federal government has been the source
of their competitive advantage in the American residential mortgage market (Reiss,
2008, p. 1019).
Fannie and Freddie primarily engage in two activities. First, they help mortgage
originators package their mortgages into residential mortgage-backed securities
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The author would like to thank William Garrett and Jason Gang for excellent research
assistance. This paper is based in part on a longer article, Reiss, D. (2008), “The federal
government’s implied guarantee of Fannie Mae and Freddie Mac’s obligations: uncle Sam will
pick up the tab”, Georgia Law Review, Vol. 42, p. 1019.
JFRC
17,3
336
Journal of Financial Regulation and
Compliance
Vol. 17 No. 3, 2009
pp. 336-348
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980910972269
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