WASHINGTON - It's unusual, even in Washington, to propose fixing a government program that appears to be working smoothly.
But Thomas H. Stanton, a lawyer and longtime critic of government- sponsored enterprises, is doing just that. He says this is the right time to take up the touchy issue of privatizing the housing finance agencies.
Writing in The Financier, a scholarly journal dealing with the capital markets, Mr. Stanton argues that the government should negotiate to privatize the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. within 10 years.
The agencies have fulfilled their mission, namely, to free up the flow of credit in imperfect markets, he writes.
Now, private institutions are marketing the mortgage-backed securities pioneered by the agencies. And to turn a profit, Mr. Stanton believes, the agencies will be forced to take on more risk.
"I'm not saying the sky is falling," he said in a recent conversation. But "we are playing the odds."
He said he believes that the public benefit derived from government sponsorship of Fannie Mae and Freddie Mac is not worth the potential risk to taxpayers. Between them, the agencies have more than $1.3 trillion of contingent liabilities, he pointed out, and he worries about the potential cost of a bailout.
It is estimated that the interest rate charged on agency-backed mortgages is 40 basis points lower than on private-label mortgage securities.
Mr. Stanton noted that interest rates on mortgages have varied by more than three percentage points in the last couple of years, making the government "subsidy" small by comparison.
In addition, he said, the government gives homeowners a far larger subsidy in the mortgage interest tax deduction.
Understandably, neither agency has shown any interest in giving up its implicit government backing. So Mr. Stanton proposes an incentive.
With Congress intent on modifying the Department of Housing and Urban Development's FHA program, Mr. Stanton believes the FHA's reconfigured business could be channeled through Fannie Mae and Freddie Mac in exchange for their agreement to go fully private.
He calculates that if the FHA were to leave the business of insuring individual mortgages and provide only credit enhancement for pools of mortgages Fannie Mae and Freddie Mac could expand their business by up to 20% through investments in these mortgages.
A Freddie Mac spokesman said, "The current system works well, and we continue to make a substantial contribution to the housing finance system."
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Analyst Gary Gordon of Paine Webber Inc. recently issued an optimistic report on prospects for loan growth at the two agencies. His 1996 earnings estimates are above the consensus: $10 per share for Fannie Mae and $6.75 for Freddie Mac.
He based his predictions on the increased supply of fixed-rate loans and decreased demand from other investors for these loans. Using a rough definition of the mortgage investment market as including the agencies and buyers of real estate mortgage investment conduits, Mr. Gordon estimated that the agencies' share of the market has shot up in recent years from 20% to 75% in 1995 to date.