W. Scott Frame, Andreas Fuster, Joseph Tracy, and James Vickery

Working Paper 2015-2
March 2015

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We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.

JEL classification: G01, G21, H12

Key words: Fannie Mae, Freddie Mac, housing finance, financial crisis, government intervention

The authors are grateful for the thoughtful comments of their discussant, Amir Sufi, and participants at the symposium held by the Journal of Economic Perspectives at the University of Chicago. They also received helpful suggestions from many others, including Adam Ashcraft, David Autor, Mike Fratantoni, Kris Gerardi, Laurie Goodman, Joseph Gyourko, Chang-Tai Hsieh, Wayne Passmore, David Scharfstein, Timothy Taylor, Larry Wall, Larry White, Paul Willen, and Joshua Wright. They also thank Karen Shen and Ulysses Velasquez for research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Banks of Atlanta and New York or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to W. Scott Frame, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, scott.frame@atl.frb.org; Andreas Fuster, Economic Research, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, andreas.fuster@ny.frb.org; Joseph Tracy, Economic Research, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, joseph.tracy@ny.frb.org; or James Vickery, Economic Research, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, james.vickery@ny.frb.org.
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