For a very long time there has been a battle brewing in Washington, the question of whether the special federal status enjoyed by Fannie Mae and Freddie Mac should or should not be continued.

This may seem like dry stuff, so allow me to make it more interesting: Would you rather pay more or less for your mortgage?

Fannie Mae and Freddie Mac own millions of mortgages nationwide. They don't make loans directly to homeowners, instead they buy loans from lenders in what is called the "secondary market." In effect, local lenders know that if a loan meets certain requirements they can be sold on the secondary market to Fannie, Freddie or private companies. By selling the loan, the local lender has fresh capital and can create more mortgages. Because of the secondary market, you can move just about anywhere in the U.S. and be certain that mortgage financing will be available at competitive rates and terms.

Freddie Mac and Fannie Mae started as government entities and today they are shareholder owned government sponsored enterprises (GSEs), a dual status which means they have special legal and tax advantages not available to private competitors.

For instance, GSEs do not pay most state or local income taxes. According to FM Policy Focus, Fannie Mae and Freddie Mac "are not subject to the Gramm-Leach-Bliley privacy provisions enacted to protect consumers' personal financial information. Because of their special benefits, and because of their ties to the federal government, the GSEs can borrow money at lower rates than any other entity, except for the U.S. Treasury. The GSEs use their advantages to increase stockholder returns, without comparable returns to the nation's homebuyers and taxpayers."

The counter-argument works like this: It's true that Fannie and Freddie obtain unique federal benefits -- and consumers have benefited.

"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, Freddie Mac said in 2001. "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's activities significantly exceeds the value of their funding advantage."

But now the question emerging in Washington is this: Do we still need government-sponsored entities with access to federal credit and special tax preferences? Can't the private sector do this work?

Fannie Mae, for example, generated a net income of $1.941 billion in the first quarter of 2003, up 60.5 percent over the first quarter of 2002; diluted earnings per share were $1.93, up 65.0 percent.

Freddie Mac is also doing well: in 2002 the firm had profits of $5.7 billion -- up 39 percent from the prior year.

Both Fannie Mae and Freddie Mac have reported terrific financial results -- but what about companies in the private sector who offer similar services? Why should they be at a disadvantage when competing for capital? Why should Fannie Mae and Freddie Mac have special tax advantages when they generate enormous profits for investors?

If Fannie Mae and Freddie Mac must continue as wards of the federal government, then should the huge profits they enjoy be returned in whole or in part to offset the federal deficit or to further reduce borrower costs? Should Fannie and Freddie be privatized and made to operate just like other companies?

These are tough questions and you can find partisans on both sides of every issue. Already some changes have been made. For instance, last year Fannie Mae and Freddie Mac agreed to voluntarily file periodic financial disclosures with the Securities & Exchange Commission.

Alternatively, there are steps that have not been taken:

"Freddie Mac's securities," says the company, remain "exempt from securities offering registration requirements as well as other aspects of the federal securities laws."

"Fannie Mae's debt and Mortgage-Backed Securities (MBS) that support the company's secondary market activities will not be subject to the registration process, but investors in those securities will receive and benefit from the mandatory corporate disclosures made regarding Fannie Mae's common stock," says Fannie Mae.

Private companies say Fannie Mae and Freddie Mac no longer need special federal protections to compete. Now Congress has begun to look into the matter and for the first time in decades it's possible that the basic rules for Fannie and Freddie may change.

For more articles by Peter G. Miller, please press here.

Published: June 17, 2003

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .