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Monday, October 10, 2011

Fannie MAE and Freddie MAC: A Compendium

The federal government has invested more than $150 billion in Fannie Mae and Freddie Mac, two congressionally chartered companies that buy residential mortgages. The 112th Congress may decide to hold oversight hearings or legislate changes that will affect the future of Fannie Mae, Freddie Mac, and the home mortgage system.

The continuing conservatorship of Fannie Mae and Freddie Mac at a time of uncertainty in the housing, mortgage, and financial markets has 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.

Once Treasury’s support for Fannie Mae and Freddie Mac ends, sometime after 2012, the GSEs will be challenged to pay the 10% annual cash dividend contained in their contracts. The enterprises could instead pay a 12% annual senior preferred stock dividend indefinitely.

In August 2011, Standard & Poor’s downgraded the debt of the federal government, Fannie Mae, and Freddie Mac. To date, there is no evidence that this has increased mortgage interest rates, but the impact may take longer to occur or to be detected.

The 112th Congress is likely to consider the future of the GSEs and ways to reduce the cost to the federal government.

Date of Compendium: August 17, 2011
Number of Pages: 150
Order Number: IS40298

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