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.
In 2008, the Federal Housing Finance Agency (FHFA) replaced the Office of
Federal Housing Enterprise Oversight (OFHEO) as the GSEs’ safety and
soundness regulator and took them into conservatorship. OFHEO had
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 themselves against losses.
The Treasury agreed to buy mortgage-backed securities (MBSs) from the GSEs and
to 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 holds more than $187 billion of preferred stock in the
two GSEs. Treasury 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.
Under terms of the federal government’s purchase of their preferred stock, the
enterprises are required to pay the government dividends of nearly $20
billion annually (10% of the support). Housing, mortgage, and even general
financial markets remain in an unprecedented situation.
Estimates of the total cost to the federal government use different baselines
and vary widely. The FHFA estimates that Treasury is likely to purchase
$220 billion-$311 billion of senior preferred stock by the end of 2014.
The Congressional Budget Office estimates the budget cost to be more than
$300 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.
Legislation introduced in the 112th Congress, the future of the GSEs, and ways
to reduce the cost to the federal government are analyzed in CRS Report
R41822, Proposals to Reform Fannie Mae and Freddie Mac in the 112th Congress,
by N. Eric Weiss.
Date of Report: July 23, 2012
Number of Pages: 26 Order Number: RL34661 Price: $29.95
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