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One of the issues perplexing many right now surrounds the uncertainty of what should be done with Fannie Mae and Freddie Mac. Right now, they are government sponsored enterprises (GSEs). This means that they have a government mandate, but they are run like private sector businesses, with shareholders and profits and executives with high pay. While GSEs aren’t officially back by the government, they have de facto government support, and many investors assume that the government will rescue GSEs in times of trouble. This view was borne out during the recent mortgage crisis as the government stepped in to prevent the financial collapse of Fannie Mae and Freddie Mac.

However, the current form of the two companies has not proved one to inspire confidence going forward. For now, government conservatorship is the name of the game, but what happens later? As Good Financial Cents points out, the White House has largely punted the issue, leaving it to be sorted out later. But there are still a number of options available, including using good bank/bad bank, considering utilitization of the companies, privatization and nationalization.

Will Fannie and Freddie become government institutions?

Fannie Mae was once a government run company before it became a GSE (Freddie was always a GSE). For now, the fact that taxpayers are providing some help via government assistance, is keeping the two companies going. And this is a good thing, since together they are responsible for most of the mortgages in the U.S. — either facilitating their origination or servicing them. But what should the fate of such behemoths be? It is clear that they can’t be privatized completely. At least not yet. A substantial change in the current situation would have to be seen before Fannie and Freddie could stand on their own. And tighter lending standards would be needed.

But what about nationalization? Could the U.S. handle the increased debt burden of nationalizing these institutions? In the long run, there is the chance that the government could actually make money, since the revenues from interest and other fees could be quite helpful. But do we really want the government involved in what many think should be a business venture for the private sector?