Thursday, September 5, 2013
N. Eric Weiss
Specialist in Financial Economics
Fannie Mae and Freddie Mac are chartered by Congress as government-sponsored enterprises (GSEs) to provide liquidity in the mortgage market and to promote homeownership for underserved groups and locations. They purchase mortgages, guarantee them, and package them in mortgage-backed securities (MBSs), which they either keep as investments or sell to institutional investors. In addition to the GSEs’ guarantees, investors widely believe that MBSs are implicitly guaranteed by the federal government. In 2008, the GSEs’ financial condition had weakened and there were concerns over their ability to meet their obligations on $1.2 trillion in bonds and $3.7 trillion in MBSs that they had guaranteed. In response to the financial risks, the federal government took control of these GSEs in a process known as conservatorship as a means to stabilize the mortgage credit market.
Congressional interest in Fannie Mae and Freddie Mac has increased in recent years, primarily because the federal government’s continuing conservatorship of these GSEs. Uncertainty in the housing, mortgage, and financial markets has raised doubts about the future of the enterprises and the potential cost to the Treasury of guaranteeing the enterprises’ debt. Since more than 60% of households are homeowners, a large number of citizens could be affected by the future of the GSEs. Congress exercises oversight over the Federal Housing Finance Agency (FHFA), which is both regulator and conservator of the GSEs, and is considering legislation to shape the future of the GSEs.
Estimates of the eventual total cost to the federal government of supporting the GSEs use different baselines and vary widely. In 2012, FHFA estimated that, by the end of 2015, Treasury is likely to have purchased between $191 billion and $209 billion of senior preferred stock, and the Congressional Budget Office has estimated the GSEs will pay Treasury dividends amounting to $30 billion between FY2013 and FY2017 and $44 billion between FY2013 and FY2022.
Under terms of the federal government’s support agreement as amended and effective on August 17, 2012, the enterprises will pay the Treasury all of their quarterly profits (if any). Under the previous agreements, the enterprises paid Treasury dividends of nearly $20 billion annually (10% of the support). Paying the federal government all profits earned in a quarter could prevent the GSEs from accumulating funds to redeem the senior preferred stock. However, it would appear that the GSEs could make quarterly redemptions.
The financial condition of the GSEs continues to improve. In the second quarter of 2013, Fannie Mae paid slightly less than $60 billion in dividends to Treasury and Freddie Mac paid slightly less than $7 billion in dividends.
Date of Report: August 13, 2013
Number of Pages: 27
Order Number: R42760
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