Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks - Why and How?

The first question everyone asks about a project to privatize Fannie Mae,Freddie Mac, and the Federal Home Loan Banks (collectively, the housing GSEs) is, Why? This question has two levels. The first is substantive: The U.S. housing finance system performs very well, or at least adequately; there are few complaints; why do you want to change it? The second is political: Yes, there are problems, but they can be addressed through better regulation; why bother to privatize these companies when there is very little political opposition to improving how they are regulated and quite a bit of opposition to privatization?
The answer to both questions is relatively simple. The housing GSEs contribute little to the quality of the U.S. housing finance system, yet they create risks for the taxpayers and the entire economic system that cannot be adequately addressed by regulation.1 A sound privatization program should solve both problems, providing an improved housing finance system and eliminating the risks that the housing GSEs—and particularly Fannie Mae and Freddie Mac—create for the taxpayers and the economy generally.