N. Eric Weiss
Specialist in Financial Economics
The federal government’s role in the mortgage market dates to the Depression and is considered by many to be substantial: Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA, which is part of the Department of Housing and Urban Development) together guaranteed more than 90% of new mortgages in 2010. With more than $10 trillion in mortgages outstanding, the residential mortgage market is of central importance both to households and to lenders.
As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac have special privileges and obligations. Their congressional charters give them a close relationship to the federal government that is widely (but not universally) viewed as an implicit federal guarantee of their bonds and mortgage-backed securities (MBS). Broadly speaking, their role is to ensure appropriate availability of mortgages to creditworthy households. By law, the GSEs purchase mortgages from lenders, and either hold the mortgages as investments or pool the mortgages into mortgage-backed securities, which are sold to institutional investors. The GSEs guarantee that investors in these MBS will receive timely payment of principal and interest even if the borrower becomes delinquent. In recent years, Fannie Mae and Freddie Mac jointly have been responsible for approximately $5 trillion, which is 45% of residential mortgages outstanding.
In September 2008, the GSEs individually agreed with their regulator, the Federal Housing Finance Agency (FHFA), that unexpected mortgage delinquencies and resulting losses jeopardized their solvency. The GSEs agreed to direct government control, known as conservatorship, which is the equivalent of a bankruptcy reorganization for financial companies. As part of the agreement to conservatorship, Treasury agreed to provide financial support to keep the GSEs solvent. As amended, the agreement requires Treasury to provide whatever funds are necessary to keep the GSEs afloat through December 2012. Treasury is to provide additional support after 2012, subject to a complex formula that depends in part on the GSEs’ condition at the end of 2012. In return for this support, Treasury receives special stock and other considerations.
Pursuant to this agreement, the federal government has purchased more than $150 billion in special stock from Fannie Mae and Freddie Mac. In addition, the government has purchased in excess of $1.25 trillion in MBS issued by Fannie Mae and Freddie Mac.
The 112th Congress and the Administration are deliberating how and when to unwind the federal control of Fannie Mae and Freddie Mac, and what (if any) is the proper role of the federal government in the nation’s mortgage markets. Some proposals have called for reducing the government’s support of Fannie Mae and Freddie Mac, selling off their assets, and revoking their congressional charters. Other proposals have concentrated not so much on unwinding Fannie Mae and Freddie Mac, as on replacing them with new institutions.
This report examines options concerning the future of the GSEs and the future government role in residential mortgage markets. Other CRS reports address related issues such as conservatorship, the GSEs’ financial condition, residential mortgage markets in other nations, and affordable housing.
Date of Report: March 11, 2011
Number of Pages: 23
Order Number: R40800
Price: $29.95
Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.
Specialist in Financial Economics
The federal government’s role in the mortgage market dates to the Depression and is considered by many to be substantial: Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA, which is part of the Department of Housing and Urban Development) together guaranteed more than 90% of new mortgages in 2010. With more than $10 trillion in mortgages outstanding, the residential mortgage market is of central importance both to households and to lenders.
As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac have special privileges and obligations. Their congressional charters give them a close relationship to the federal government that is widely (but not universally) viewed as an implicit federal guarantee of their bonds and mortgage-backed securities (MBS). Broadly speaking, their role is to ensure appropriate availability of mortgages to creditworthy households. By law, the GSEs purchase mortgages from lenders, and either hold the mortgages as investments or pool the mortgages into mortgage-backed securities, which are sold to institutional investors. The GSEs guarantee that investors in these MBS will receive timely payment of principal and interest even if the borrower becomes delinquent. In recent years, Fannie Mae and Freddie Mac jointly have been responsible for approximately $5 trillion, which is 45% of residential mortgages outstanding.
In September 2008, the GSEs individually agreed with their regulator, the Federal Housing Finance Agency (FHFA), that unexpected mortgage delinquencies and resulting losses jeopardized their solvency. The GSEs agreed to direct government control, known as conservatorship, which is the equivalent of a bankruptcy reorganization for financial companies. As part of the agreement to conservatorship, Treasury agreed to provide financial support to keep the GSEs solvent. As amended, the agreement requires Treasury to provide whatever funds are necessary to keep the GSEs afloat through December 2012. Treasury is to provide additional support after 2012, subject to a complex formula that depends in part on the GSEs’ condition at the end of 2012. In return for this support, Treasury receives special stock and other considerations.
Pursuant to this agreement, the federal government has purchased more than $150 billion in special stock from Fannie Mae and Freddie Mac. In addition, the government has purchased in excess of $1.25 trillion in MBS issued by Fannie Mae and Freddie Mac.
The 112th Congress and the Administration are deliberating how and when to unwind the federal control of Fannie Mae and Freddie Mac, and what (if any) is the proper role of the federal government in the nation’s mortgage markets. Some proposals have called for reducing the government’s support of Fannie Mae and Freddie Mac, selling off their assets, and revoking their congressional charters. Other proposals have concentrated not so much on unwinding Fannie Mae and Freddie Mac, as on replacing them with new institutions.
This report examines options concerning the future of the GSEs and the future government role in residential mortgage markets. Other CRS reports address related issues such as conservatorship, the GSEs’ financial condition, residential mortgage markets in other nations, and affordable housing.
Date of Report: March 11, 2011
Number of Pages: 23
Order Number: R40800
Price: $29.95
Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.
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