Thursday, February 21, 2013
N. Eric Weiss
Specialist in Financial Economics
The federal government’s role in the mortgage market dates to the Depression and is considered by many to be substantial: Fannie Mae, Freddie Mac, and Ginnie Mae (officially the Government National Mortgage Association, which is part of the Department of Housing and Urban Development) together guaranteed virtually all new mortgage-backed securities (MBS) in the third quarter of 2012; Fannie Mae and Freddie Mac guaranteed 78% of new MBS and 48% of residential mortgages outstanding. With slightly less than $10 trillion in mortgages outstanding, the residential mortgage market is of central importance both to households and to lenders.
As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac have special privileges and obligations. Their congressional charters give them a close relationship to the federal government that is widely (but not universally) viewed as an implicit federal guarantee of their bonds and MBS. Broadly speaking, their role is to ensure appropriate availability of mortgages to creditworthy households. By law, the GSEs purchase mortgages from lenders, and either hold the mortgages as investments or pool the mortgages into mortgage-backed securities, which are sold to institutional investors. The GSEs guarantee that investors in these MBS will receive timely payment of principal and interest even if the borrower becomes delinquent.
In September 2008, the GSEs individually agreed with their regulator, the Federal Housing Finance Agency (FHFA), that unexpected mortgage delinquencies and resulting losses jeopardized their solvency. The GSEs agreed to direct government control, known as voluntary conservatorship, which is the equivalent of bankruptcy reorganization for a financial company. As part of the agreement to conservatorship, Treasury contracted to provide financial support to keep the GSEs solvent. Pursuant to this agreement, which has been amended three times, the federal government has purchased more than $187 billion in special stock from Fannie Mae and Freddie Mac. In addition, the government holds $821 billion in MBS issued by Fannie Mae and Freddie Mac. The agreement requires Treasury to provide up to $274 billion of additional funds, if necessary. In return for this support, Treasury receives special stock and other considerations.
The 113th Congress and the Administration are deliberating how and when to unwind the federal control of Fannie Mae and Freddie Mac, and what (if any) is the proper role of the federal government in the nation’s mortgage markets. Some proposals have called for reducing the government’s support of Fannie Mae and Freddie Mac, selling off their assets, and revoking their congressional charters. Other proposals have concentrated not so much on unwinding Fannie Mae and Freddie Mac, as on replacing them with new institutions.
It is not only Fannie Mae and Freddie Mac that have raised issues. At the end of FY2012, the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development, reported the fund backing its insured mortgages had a negative net worth of -1.44%.
This report examines options concerning the future of the GSEs and the future government role in residential mortgage markets. Other CRS reports address related issues such as conservatorship, the GSEs’ financial condition, residential mortgage markets in other nations, and affordable housing.
Date of Report: February 11, 2013
Number of Pages: 21
Order Number: R40800
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