Search Penny Hill Press

Friday, January 15, 2010

Fannie Mae’s and Freddie Mac’s Financial Problems

N. Eric Weiss
Specialist in Financial Economics

The conservatorship of Fannie Mae and Freddie Mac raises questions about their impact on the housing and finance markets and their ability to return to financial viability: the federal government has purchased more than $110 billion in the two companies. Both companies are required under terms of the federal support to pay the government dividends of $11 billion annually (10% of the support). Housing, mortgage, and even general financial markets continue in an unprecedented situation. 

The Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship after turmoil in the housing, mortgage, and financial markets raised doubts about the future of these enterprises, which are chartered by Congress as government-sponsored enterprises (GSEs) and whose debts are widely believed to be implicitly guaranteed by the federal government. The FHFA replaced the Office of Federal Housing Enterprise Oversight (OFHEO) as the GSEs' safety and soundness regulator. OFHEO repeatedly assured investors that Fannie and Freddie had adequate capital, but as highly leveraged financial intermediaries, Fannie Mae and Freddie Mac had limited capital to cushion them against losses. 

The Treasury agreed to buy mortgage-backed securities (MBSs) from the GSEs and raise funds for them. Initially, each GSE gave Treasury $1 billion in senior preferred stock and warrants to acquire, at nominal cost, 80% of each GSE. Treasury has purchased slightly more than $112.6 billion of preferred stock in the two GSEs, and has agreed to invest whatever is required to maintain GSE solvency through calendar year 2012. Now the formerly implicit guarantee is nearly explicit. 

In addition to Treasury's purchases of senior preferred stock, the Federal Reserve (Fed) has purchased GSE bonds and MBSs. According to a December 10, 2009, FHFA report, together the Fed and Treasury have purchased $1,199.8 billion in MBSs. This report will be updated as warranted.

Date of Report: December 31, 2009
Number of Pages: 22
Order Number: RL34661
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail or call us at 301-253-0881.