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The Rescue of Fannie Mae and Freddie Mac

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The Rescue of Fannie Mae and Freddie Mac

Federal Reserve Bank of Atlanta,

15 min read
10 take-aways
Audio & text

What's inside?

Fannie Mae and Freddie Mac are healthier in 2015 than they were in 2008, thanks to government intervention, but their problems aren’t over.

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Editorial Rating

8

Recommendation

The story behind Fannie Mae and Freddie Mac’s rise and fall is a cautionary tale about what can happen when good government intentions have less than satisfying outcomes. The major role these firms played in fueling the 2008 financial crisis became apparent when the US government took them into conservatorship to protect some $5.2 trillion in mortgage debt. By mid-2015, with tighter lending standards, a better housing market and an improving economy, the financial picture for the two agencies looked much brighter than it was in 2008. Still, as this astute report from Federal Reserve Bank of Atlanta says, long-term solutions that would make the mortgage market less vulnerable to shocks remain elusive. Federal Reserve economists W. Scott Frame, Andreas Fuster, Joseph Tracy and James Vickery do an excellent job of explaining the government’s role in saving Fannie Mae and Freddie Mac, while also discussing some of the effort’s tactical shortcomings. getAbstract recommends this report to economists, bankers and anyone seeking new perspectives on past and current risks in the US residential mortgage finance market.

Summary

Building on Shaky Ground

When the United States’ government took the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship in September 2008, the agencies held or had guaranteed roughly a combined $5.2 trillion in residential mortgages. These government-sponsored enterprises (GSEs) – privately owned financial service companies with a public mandate to ensure the liquidity and soundness of the American home mortgage market – played a major part in fueling the 2008 financial crisis.

Before the crisis, the two agencies – which Congress created primarily to help low- and middle-income Americans secure mortgages – were role models for public-private partnerships. But evidence shows that these partnerships stood on the shaky ground of an increasingly risky mortgage financing market and an inadequate regulatory environment. As the 2008 crisis intensified, the two GSEs battled the rising tides of high leverage and mortgage defaults.

Good Intentions

By law, Fannie and Freddie can’t lend money directly to homebuyers. Their remit consists of two main businesses: “Credit guarantee” activities...

About the Authors

W. Scott Frame is an economist at the Federal Reserve Bank of Atlanta. Andreas Fuster, Joseph Tracy and James Vickery are economists at the Federal Reserve Bank of New York.

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