The Evolution of a Policy Idea: How Restrictions on the Size of the GSEs’ Portfolios became the Central Issue in Reform of their Regulation

Peter J. Wallison

No 2006-PB-03, NFI Policy Briefs from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: The portfolios of mortgages and mortgage-backed securities held by Fannie Mae and Freddie Mac have now become the central issue in the legislative battle over improvements in their regulation. But it was not always so. When the notion of improving their regulation was first advanced in 2000, the objective of those who favored tighter regulation was far more limited. Only after it was found that Freddie Mac had violated accounting rules did policy-makers—and particularly Fed chairman Alan Greenspan—begin to suggest that the only way to protect against the systemic risk associated with the GSEs was to limit, reduce or eliminate their portfolios of mortgages and mortgage-backed securities. If this approach is ultimately adopted by Congress, it will substantially reshape their business model and perhaps induce them to give up their government charters.

Pages: 23 pages
Date: 2006-03
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