Evaluating The Rescue Of Fannie Mae And Freddie Mac

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Evaluating The Rescue Of Fannie Mae And Freddie Mac

Evaluating The Rescue Of Fannie Mae And Freddie Mac by W. Scott Frame, Andreas Fuster, Joseph Tracy, and James Vickery, Federal Bank Of New York

The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation-commonly known as Fannie Mae and Freddie Mac-was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the US housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt.

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Fannie Mae and Freddie Mac are publicly held financial institutions that were created by Acts of Congress to fulfill a public mission: to enhance the liquidity and stability of the US secondary mortgage market and thereby promote access to mortgage credit, particularly among low- and moderate-income households and neighborhoods. Their federal charters provide important competitive advantages
that, taken together, implied US taxpayer support of their financial obligations. As profit-maximizing firms, Fannie Mae and Freddie Mac leveraged these advantages over the years to become very large, very profitable, and very politically powerful. The two firms were often cited as shining examples of public-private partnerships—that is, the harnessing of private capital to advance the social goal of expanding homeownership. But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail at some point, owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities (for a detailed discussion, see Acharya et al. 2011). A purposefully weak regulatory regime was another important feature of the flawed design. While the structural problems with Fannie Mae and Freddie Mac were understood by many, serious reform efforts were often portrayed as attacks on the American Dream of homeownership, and hence politically unpalatable.

In 2008, as the housing crisis intensified, Fannie Mae and Freddie Mac became financially distressed. Their concentrated exposure to US residential mortgages, coupled with their high leverage, turned out to be a recipe for disaster in the face of a large nationwide decline in home prices and the associated spike in mortgage defaults. As financial markets in the summer of 2008 turned against Fannie Mae and Freddie Mac, the federal government initially responded by passing the Housing and Economic Recovery Act (HERA), signed into law on July 30, 2008, which among many other provisions
temporarily gave the US Treasury unlimited investment authority in the two firms. Less than two months later, their new regulator, the Federal Housing Finance Agency (FHFA), placed Fannie Mae and Freddie Mac into conservatorship, taking control of the two firms in an effort to curtail the risk of financial contagion and to conserve their value. Concurrently, the Treasury entered into senior preferred stock purchase agreements with each institution. Under these agreements, US taxpayers ultimately injected $187.5 billion into Fannie Mae and Freddie Mac.

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This paper begins by describing the business model of Fannie Mae and Freddie Mac and their role in the US housing finance system. Our focus then turns to the sources of financial distress experienced by the two firms and the events that ultimately led the federal government to take dramatic action in an effort to stabilize housing and financial markets. We describe the various resolution options available to US policymakers at the time and evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage
supply, and on the financial position of the two firms themselves. Our overall conclusion is that conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution. More than six years later, Fannie Mae and Freddie Mac still remain in conservatorship and opinion remains divided on what their ultimate fate should be.

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3 COMMENTS

  1. a lot of BS. for example:
    ” … The imposition of federal conservatorships on September 6, 2008, at the
    Federal National Mortgage Association and the Federal Home Loan Mortgage
    Corporation-commonly known as Fannie Mae and Freddie Mac-was one of the
    most dramatic events of the financial crisis. ….” BWS

    if you would know the analysis of the european central bank, the most dramatic crises was the theft of the wamubank by JPm, assisted by the FDIC and the crooks in the bush and obama gubernment. after the theft, every sane investor and corporation transfered their money from the usa to the EZB, and with this started the world wide crisis of 2008.

    or: ” …But in reality, the hybrid structures of Fannie Mae and Freddie Mac were
    destined to fail at some point, owing to their singular exposure to
    residential real estate and moral hazard incentives emanating from the
    implicit guarantee of their liabilities …..” BS. the problem with F&F was, that the managment was not chosen by the shareholders, the managment was installed by the crooks of the administration, and that was at the moment bush and his croonies. and then this bush croonies got the order from bush and paulson, to buy all the roxic mbs from GOldman Sachs and JPM. we know how that ended …..

    we all know, F&f were a big cash cow for its private shareholders, and therefore the gansterbanksters at JPm and Goldman Sachs wanted them destroyed. and if you look, who is helping them in the gubernment, senat, house and administration, you find very easy the culprits, who will help GS and JPM make the next scam. warren, corker, bush, rubio, and so on.

  2. Fannie and Freddie became the scapegoats for all that was bad on Wall Street. Our government blamed them while all others were exonerated.
    If our government did not have Fannie and Freddie in place at that time and had several private companies doing what they were doing. Then our government would have would have certainly had to bail out of them!!
    But Fannie and Freddie could have weathered the storm. They were certainly stronger than our government made them out to be and did not need the loans that they were given. The loans were merely a way for those in our government to get rid of them so the so called private sector (meaning those who are in power now could cash in on a gold mine) could take control and maximize their profits.
    So if Fannie and Freddie are dissolved. The question becomes who takes all the loans and who gets all the profits. Will it be the taxpayers or will it be those at the top on Wall Street???????

  3. The conclusion is buried in “White Paper” at the very end, that the loans to the agencies were unnecessary. That would be the real starting point for any meaningful public discussion. This article should have been one or two sentences, if the writer didn’t intend to discuss the significance of the conclusion.

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