Title: Fannie Mae and Freddie Mac
The federal government has invested more than $150 billion in Fannie Mae and Freddie Mac, two congressionally chartered companies that buy residential mortgages.
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.
Estimates of the total cost to the federal government use different baselines and vary widely. The FHFA estimates that Treasury is likely to purchase $221 billion-$363 billion of senior preferred stock by the end of 2013. The Congressional Budget Office estimates the budget cost for 2011-2020 to be $53 billion. Standard & Poor’s has estimated the cost at $280 billion plus $405 billion to create a replacement system.
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.
Date of Compendium: October 12, 2011
Number of Pages: 150
Order Number: IS40298
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