Competition for Fannie Mae and Freddie Mac?

BY W. SCOTT FRAME, Federal Reserve Bank of Atlantaand LAWRENCE J. WHITE, New York University

Less widely recognized are two emerging and potentiallypowerful sources of new competition for Fannie Mae and FreddieMac: an expanded mortgage finance program by the FederalHome Loan Bank System and new bank risk-based capitalstandards that are likely to be implemented in 2006. Morecompetition should generally be welcomed. But this heightenedcompetition could create incentives for Fannie Mae andFreddie Mac to take greater risks, with potentially unfavorableconsequences for U.S. taxpayers. As a result, unless the twofirms were to be privatized quickly (which is highly unlikely),enhanced regulatory scrutiny will be in order.

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