While, the current downturn has shown this to be not quiet true, FNM and FRE have been able to loosen credit markets during past tightenings. The result being a constant availability of home-loan credit for qualifying homebuyers. Yes, this has pushed, in a sense, lenders to try and acquire larger returns by taking on more risk, but they were not forced. Without Fannie and Freddie they may have earned a slightly higher return on the loans they currently sell off to them, but they might also have been able to lend less. This might decrease the availability of home-loans and consequently the number of homes purchased . Furthermore, because of the importance of home-ownership on an average consumers ability to borrow, FNM and FRE could even be said to contribute to greater consumption.

One question that I have heard asked is why congress did not propose acquiring the GSE’s outright and continue to run them like they run Ginnie Mae (the only GSE that was not privatized). This would punish the shareholders and continue to allow the GSE’s to do the job we purportedly want them to do.

Whether or not owning a home should be part of the “American Dream”, and whether or not housing should have this important a role in our economy should are further question.

http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1

“Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

“Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

“So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.”