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Friday, July 15, 2011

Proposals to Reform Fannie Mae and Freddie Mac in the 112th Congress

N. Eric Weiss
Specialist in Financial Economics

As households and taxpayers, Americans have a large stake in the future of Fannie Mae and Freddie Mac. Homeowners and potential homeowners indirectly depend on Fannie Mae and Freddie Mac, which at the end of 2010 backed and guaranteed home loans accounting for nearly half of the outstanding home mortgages in the nation.

Taxpayers have a large investment in Fannie Mae and Freddie Mac. Through the end of 2010, the Department of the Treasury kept the two insolvent companies in business by providing more than $150 billion in support. Based on past performance, it is not clear how the enterprises will be able to repay Treasury out of future earnings. In addition to the $150 billion in direct support, Treasury and the Federal Reserve (the Fed) purchased nearly $1.4 trillion in GSE-issued and guaranteed mortgage-backed securities (MBS).

These two entities are stockholder-owned, congressionally chartered companies that purchase home mortgages, commonly called government-sponsored enterprises (GSEs). In 2008, increasing mortgage delinquencies and the general financial crisis weakened the two enterprises to the point that they agreed to a voluntary takeover by the federal government known as conservatorship.

This report summarizes and analyzes bills introduced in the 112
th Congress that seek to enhance the public accountability of the two enterprises. The bills covered are H.R. 31, H.R. 408, H.R. 463, H.R. 1182, H.R. 1221, H.R. 1222, H.R. 1223, H.R. 1224, H.R. 1225, H.R. 1226, H.R. 1227, H.R. 1859, H.R. 2413, H.R. 2425, H.R. 2428, H.R. 2436, H.R. 2439, H.R. 2440, H.R. 2441, S. 178, and S. 693. Some seek to reduce the cost to the government, while others seek to change the enterprises’ charters if or when they leave conservatorship. None of the above bills introduced proposes government actions to replace the two enterprises.

To date, two bills, H.R. 1859 and H.R. 2413, propose creating a replacement for the two enterprises. H.R. 1859 would authorize the Federal Housing Finance Agency (FHFA) to charter special purpose associations to support the secondary mortgage market by issuing MBS with an explicit federal catastrophic guarantee. The associations would be charged for this guarantee. H.R. 1859 would require FHFA to develop a plan to transition from enterprise support for the secondary mortgage market to support by these new associations.

The second bill, H.R. 2413, would create a government corporation (the Secondary Market Facility for Residential Mortgages) to purchase and to securitize mortgages. Those selling mortgages to the facility would be required to pay guarantee and reinsurance fees for an explicit federal guarantee on the securities.

Because Fannie Mae and Freddie Mac are under conservatorship, Congress has unusual leverage to direct FHFA, which is both their regulator and conservator, to implement policy changes. Currently, FHFA has unusual control in that it both regulates and manages Fannie Mae and Freddie Mac.

Date of Report: July 8, 2011
Number of Pages: 19
Order Number: R41822
Price: $29.95

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