Federal takeover of Fannie Mae and Freddie Mac
[1][2] As of 2024, Fannie Mae and Freddie Mac remain under conservatorship, and after more than repaying their Treasury loans are building capital reserves for an expected eventual exit.
[9][10][11][12] In 2003, the Bush Administration sought to create a new agency, replacing the Office of Federal Housing Enterprise Oversight, to oversee Fannie Mae and Freddie Mac.
[13] While Senate and House leaders voiced their intention to bring about the needed legislation, no reform bills materialized.
[16] In 2005, the Federal Housing Enterprise Regulatory Reform Act,[17] sponsored by Senator Chuck Hagel (R-NE) and co-sponsored by Senators Elizabeth Dole (R-NC), John McCain (R-AZ) and John Sununu (R-NH),[18] would have increased government oversight of loans given by Fannie Mae and Freddie Mac.
[19][20] The Housing and Economic Recovery Act of 2008—passed by the United States Congress on July 24, 2008, with bipartisan support and signed into law by President George W. Bush on July 30, 2008—enabled expanded regulatory authority over Fannie Mae and Freddie Mac by the newly established FHFA, and gave the U.S. Treasury the authority to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac, limited only by the amount of debt that the entire federal government is permitted by law to commit to.
[33] The September 6, 2008 conservatorship and the subsequent planned Treasury infusion of capital support the senior liabilities, subordinated indebtedness, and mortgage guarantees of the two firms.
The net exposure to taxpayers is difficult to determine at the time of the takeover and depends on several factors, such as declines in housing prices and losses on mortgage assets in the future.
The bill, if it were passed, would modify the budgetary treatment of federal credit programs, such as Fannie Mae and Freddie Mac.
Banks were required to write down the value of Freddie and Fannie preferred stock held in their portfolios, compounding capitalization concerns for certain U.S.
[40] Gateway bank agreed to be bought out by Hampton Roads Bankshares Inc. to make up for a writedown of $40 million on its stock in Fannie and Freddie, which put it below regulatory requirements to be considered adequately capitalized.
In CDS parlance, this is termed a credit event, and that triggers the settling of outstanding contracts for the derivatives, which are used to hedge or speculate on the potential risk that a company will default on its bonds.
[needs update][43] Credit-default swaps on Fannie and Freddie have been among the most actively traded in the several months leading up to the conservatorship.
[42][47] The immediate reactions in the finance markets on Monday, September 8, the day following the seizure, appeared to indicate satisfaction with at least the short-term implications of the Treasury's intervention.
[48] The effects on the subprime mortgage crisis have led the government to support the soundness of the obligations and guarantees on securities issued by Fannie and Freddie to obtain funds.
The continuing soundness of GSE obligations enhances market liquidity (loanable funds) in the following ways:[49] Over 98% of Fannie's loans were paid on time in 2008.
[52] Both Fannie and Freddie had positive net worth as of the date of the takeover, meaning the value of their assets exceeded their liabilities.
The report notes: As of March 31, 2009, seriously delinquent loans accounted for 2.3% of single-family mortgages owned or guaranteed for Freddie Mac and 3.2% for Fannie Mae.
In contrast, at year-end 2008, the loans the enterprises held or guaranteed represented 56% of the U.S. single-family mortgages outstanding, but 20% of serious delinquencies.
The ongoing uncertainty surrounding the true economic value of PLS will continue to raise safety and soundness concerns.
To maintain profitability, each enterprise increased purchases of PLS backed by alternative mortgages and of high-risk whole loans.
[62] On September 24, 2012, a judge dismissed a class-action lawsuit that contended that Freddie Mac made misleading statements about its exposure to risky loans in the run-up to the company's federal takeover.
Both sides of the case petitioned the Supreme Court to review the case; during this time, the Court ruled in Seila Law LLC v. Consumer Financial Protection Bureau, 591 U.S. ___ (2020), that the Consumer Financial Protection Bureau, another Congress-established agency with a director that could only be removed "for cause," was unconstitutional.
Subsequently, the Court certified the petition for the FHFA case to review its structure as well as determine if the profit-taking decision and other orders should be reversed should the director position be considered unconstitutional.
