Is winding down Fannie and Freddie the best option?

by Ryan Smith18 Aug 2014
We reported last week on a hedge fund that’s suing the government for diverting the profits of Fannie Mae and Freddie Mac to the Treasury, and one reader brought up an interesting point.

The hedge fund, Pershing Square Capital Management, claims the government is illegally stripping profit from investors in the companies’ common stock. The lawsuit claims the government is violating the Fifth Amendment by taking private property for public use without just compensation.

MPA reader Steve Owen responded to the story by advocating a position controversial in some circles – the dismantling of Fannie and Freddie.

“I get the Fifth Amendment argument. But, couldn't the government simply say that if they had not bailed out Fannie and Freddie, there would be no profits to take?” Owen asked. “This is the basic problem with the Public-Private set-up. Originally it was socialized risk and private profit. Now, they are mad because it is socialized profit. The only solution to this is to wind down Fannie and Freddie and set up a system of purely private, competitive mortgage financing.”

The government wants to wind down the companies eventually. However, many in the industry oppose that because they say the lack of a government guarantee would severely limit mortgage availability. And Fannie and Freddie are making record profits right now, albeit profits that are funneled right back to the government.

What do you think? Are Fannie and Freddie too important to end? Or should the mortgage industry be privatized entirely? Let us know in the comments below.
 

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