Federal takeover of Fannie Mae and Freddie Mac: Difference between revisions

{{Short description|Action taken by the U.S. Treasury in an attempt to lessen the subprime mortgage crisis}}

TheIn '''federalSeptember takeover2008, ofthe Fannie[[Federal MaeHousing andFinance FreddieAgency]] Mac'''(FHFA) wasannounced thethat placingit intowould [[conservatorship]]take ofover the [[government-sponsored enterprise]]s (GSEs) Federal National Mortgage Association ([[Fannie Mae]]) and the Federal Home Loan Mortgage Corporation ([[Freddie Mac]]). by theBoth [[U.S.government-sponsored Treasuryenterprise]]s, inwhich Septemberfinance 2008.[[home Amortgage]]s conservatorshipin isn'tthe aUnited takeoverStates ofby theissuing ownershipbonds, buthad abecome statusilliquid toas rehabilitatethe corporations.market Thefor warrantthose thatbonds thecollapsed U.S.in Treasurythe bought[[subprime wasmortgage onlycrisis]]. authorizedThe toFHFA protectestablished the[[conservatorship]]s taxpayerin (U.S.which Codeeach §1719(g)(1)(B)(iii)),enterprise's thereforemanagement itworks willunder bethe cancelledFHFA's oncedirection theto Treasuryreduce recoverslosses itsand investment.to Itdevelop wasa onenew ofoperating thestructure financialthat eventswill amongallow manya inreturn theto [[subprime mortgage crisis]]self-management.<ref name=FHFA-Lockhart-2008-09-07>

|first=James B., III

</ref><ref name='FHFA-Conservatorship-2008-09-07'>{{cite news|title=Fact Sheet: Questions and Answers on Conservatorship |date=September 7, 2008 |publisher=Federal Housing Finance Agency |url=http://www.ofheo.gov/media/PDF/FHFACONSERVQA.pdf |access-date=September 7, 2008 |url-status=dead |archive-url=https://web.archive.org/web/20080909183946/http://www.ofheo.gov/media/PDF/FHFACONSERVQA.pdf |archive-date=September 9, 2008 }}

{{Main|Financial2007–2008 financial crisis of 2007–2010}}

The combined [[Government-sponsored enterprise|GSE]] losses of US$14.9 billion and market concerns about their ability to raise capital and debt threatened to disrupt the U.S. housing financial market.{{According to whom|date=January 2017}} The Treasury committed to investinvesting as much as US$200 billion (~${{Format price|{{Inflation|index=US-GDP|value=200000000000|start_year=2009}}}} in {{Inflation/year|US-GDP}}) in preferred stock and extend credit through 2009 to keep the GSEs solvent and operating. The two GSEs had outstanding more than US$5 trillion in [[Mortgage-backed security|mortgage-backed securities]] (MBS) and debt; the debt portion alone was $1.6 trillion.<ref name="Bloomberg-CBO-2008-09-11" />

The conservatorship action has been described as "one of the most sweeping government interventions in private financial markets in decades",<ref name = 'Washington Post-Goldfarb, Cho & Appelbaum-2008-09-07'>{{cite news |first=Zachary A. |last=Goldfarb |author2=David Cho |author3=Binyamin Appelbaum |title=Treasury to Rescue Fannie and Freddie: Regulators Seek to Keep Firms' Troubles From Setting Off Wave of Bank Failures |date=September 7, 2008 |url=https://www.washingtonpost.com/wp-dyn/content/article/2008/09/06/AR2008090602540.html?hpid=topnews | worknewspaper=[[The Washington Post]] |pages=A01 | access-date=September 7, 2008}}

With a growing sense of crisis in U.S. financial markets, the conservatorship action and commitment by the U.S. government to backstop the two GSEs with up to US$200 billion in additional capital turned out to be the first significant event in a tumultuous month among U.S.-based investment banking, financial institutions, and federal regulatory bodies.{{According to whom|date=January 2017}} By September 15, 2008, the 158-year-old [[Lehman Brothers]] holding company filed for bankruptcy with the intent to liquidate its assets, leaving its financially sound subsidiaries operational and outside of the bankruptcy filing. The collapse was the largest investment bank failure since [[Drexel Burnham Lambert]] in 1990.<ref name='Lehman Brothers-Who We Are'>[https://web.archive.org/web/20080704140919/http://www.lehman.com/who/index.htm Lehman Brothers – Who we are] Retrieved September 15, 2008

The GSE business model has outperformed any other real estate business throughout its existence. According to the Annual Report to Congress,<ref>{{Cite web |url=http://www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.pdf |title=Annual Report to Congress |access-date=June 20, 2013 |archive-url=https://web.archive.org/web/20130512111622/http://www.fhfa.gov/webfiles/24009/FHFA_RepToCongr11_6_14_508.pdf |archive-date=May 12, 2013 |url-status=dead |df=mdy-all }}</ref> filed by the Federal Housing Finance Agency, over a span of 37 years, from 1971 through 2007, [[Fannie Mae]]'s average annual loss rate on its mortgage book was about four basis points. Losses were disproportionately worse during the crisis years, 2008 through 2011, when Fannie's average annual loss rate was 52 basis points. [[Freddie Mac]]'s results are comparable.

The FHFA study<ref>[http://www.fhfa.gov/webfiles/16711/RiskChars9132010.pdf FHFA study] {{webarchive|url=https://web.archive.org/web/20130220121322/http://www.fhfa.gov/webfiles/16711/RiskChars9132010.pdf |date=February 20, 2013 }}</ref> compares, on an apples-to-apples basis, GSEsGSE loan originations with those for private label securitizations. The study segments loans in four ways,: by [[adjustable-rate mortgage]]s (ARMs)- versus- fixed-rate, as well as by vintage, by FICO score, and by loan-to-value ratio. In almost every one of the 1800 different comparisons covering years 2001 through 2008, GSE loan performance was exponentially better.{{Clarify|reason=vague buzz words|date=January 2017}} On average, GSE fixed-rate loans performed four times better, and GSE ARMs performed five times better.

However, other critics in Washington, D.C.,{{Who|date=January 2017}} claim that the GSE business model faces inherent conflicts due to its combination of government mission and private ownership. The GSEs were given monopoly privileges against which private enterprise could not compete. Both GSEs had a line of credit with the US Treasury Department, and both GSEs were exempt from state and local income tax on corporate earnings. The GSEs were the only two [[Fortune 500]] companies exempt from regulation by the [[U.S. Securities and Exchange Commission|Securities and Exchange Commission]]. Because of implicit government backing, Fannie Mae discount notes became the second-largest short-term notes issued (second only to [[T-Bill#Treasury bill|Treasury bills]]).{{Citation needed|date=January 2017}}

The [[American Enterprise Institute]], a conservative think- tank, argues that "the government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk-taking and profitability. But there were two other parties—Congress and the taxpayers—that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSEs' ability to hold down mortgage rates, but it garnered even more political benefits from GSE support for affordable housing."<ref>[http://www.aei.org/publications/pubID.28704/pub_detail.asp AEI – The Last Trillion Dollar Commitment] {{webarchive |url=https://web.archive.org/web/20090226211908/http://www.aei.org/publications/pubID.28704/pub_detail.asp |date=February 26, 2009 }}</ref> However, such claims were at odds with the majority report of the Financial Crisis Inquiry Commission (FCIC).{{Citation needed|date=January 2017}}

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. In 1992, in the wake of the [[savings and loan crisis]], and over concern that similar lending problems would develop, the Office of Federal Housing Enterprise Oversight was created as part of the Department of Housing and Urban Development.<ref>{{cite news| url=https://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print | work=The New York Times | first=Stephen | last=Labaton | access-date=May 2, 2010 | title=New Agency Proposed to Oversee Freddie Mac and Fannie Mae | date=September 11, 2003}}</ref> While Senate and House leaders voiced their intention to bring about the needed legislation, no reform bills materialized. A Senate reform bill introduced by Senator [[Jon Corzine]] (D-NJ) (S.1656<ref>[{{Cite web |url=http://thomas.loc.gov/cgi-bin/bdquery/z?d108:s.01656: |title=S.1656] |access-date=September 30, 2008 |archive-date=January 25, 2016 |archive-url=https://web.archive.org/web/20160125055502/http://thomas.loc.gov/cgi-bin/bdquery/z?d108:s.01656: }}</ref>) never made it out of the 21-member (10 D, 11 R) [[United States Senate Committee on Banking, Housing, and Urban Affairs|Senate Banking, Housing, and Urban Affairs Committee]].<ref>{{cite web|url=http://www.opensecrets.org/cmteprofiles/profiles.php?cmte=SBAN&cmteid=S06&congno=108&chamber=S&cycle=2002|title=Senate Banking, Housing, and Urban Affairs Committee 108th Congress (2002 cycle): Member Money - OpenSecrets|work=OpenSecrets.org|access-date=January 23, 2017}}</ref> At the time, some members of the 108th congressCongress expressed faith in the solvency of Fannie Mae and Freddie Mac. Congressman [[Barney Frank]] (D-MA), for example, described them as "not facing any kind of financial crisis".<ref>{{cite news | first = Stephen | last=Labaton | title= New Agency Proposed to Oversee Freddie Mac and Fannie Mae | date= July 27, 2008 | url = https://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print | work=The New York Times | access-date = September 27, 2008 }}</ref>

In 2005, the Federal Housing Enterprise Regulatory Reform Act,<ref>[{{Cite web |url=http://thomas.loc.gov/cgi-bin/bdquery/z?d109:s.00190: |title=Federal Housing Enterprise Regulatory Reform Act] |access-date=September 30, 2008 |archive-date=March 8, 2015 |archive-url=https://web.archive.org/web/20150308154906/http://thomas.loc.gov/cgi-bin/bdquery/z?d109:s.00190: }}</ref> sponsored by Senator [[Chuck Hagel]] (R-NE) and co-sponsored by Senators [[Elizabeth Dole]] (R-NC), [[John McCain]] (R-AZ) and [[John E. Sununu|John Sununu]] (R-NH),<ref>[{{Cite web |url=http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00190:@@@P] |title=Bill Summary & Status - 109th Congress (2005 - 2006) - S.190 - Cosponsors - THOMAS (Library of Congress) |access-date=October 2, 2008 |archive-date=July 5, 2016 |archive-url=https://web.archive.org/web/20160705000124/http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00190:@@@P }}</ref> would have increased government oversight of loans given by Fannie Mae and Freddie Mac. Like the 2003 bill, it also died in the Senate Banking, Housing, and Urban Affairs Committee, this time in the 109th Congress. A full and accurate record of the congressional attempts to regulate the housing GSEs is given in the Congressional Record prepared in 2005.<ref>{{cite web|url=http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190 |title=GovTrack: Senate Record: FEDERAL HOUSING ENTERPRISE REGULATORY REFORM ... (109-s20060525-16) |publisher=Govtrack.us |access-date=October 2, 2008 |url-status=dead |archive-url=https://web.archive.org/web/20081010171033/http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190 |archive-date=October 10, 2008 }}</ref><ref>{{Cite web|url=https://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-7896:1|title=Government-Sposored Enterprises (GSEs): Regulatory Reform Legislation|date=October 27, 2005}}</ref>

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 — enabled2008—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. The law raised the Treasury's debt ceiling by US$800 billion, to a total of US$10.7 trillion, in anticipation of the potential need for the Treasury to have the flexibility to support Fannie Mae, Freddie Mac, or the [[Federal Home Loan Bank]]s.<ref name='NYTimes-Herszenhorn-2008-07-27'>

{{cite news | title= Credit and blame: A must-read on the origins of the crisis | date= 2008-09-11 | url = http://www.economist.com/finance/displayStory.cfm?story_id=12209655 | worknewspaper = The Economist | access-date = 2008-09-11 }}

{{cite news | last = Irwin | first = Neil |author2=Jeffrey H. Birnbaum | url =https://www.washingtonpost.com/wp-dyn/content/article/2008/07/13/AR2008071301512.html | date = 2008-07-14 | title =U.S. Unveils Plan to Aid Mortgage Giants | worknewspaper =[[The Washington Post]]| access-date = 2008-07-14}}

That plan contained three measures: an increase in the line of credit available to the GSEs from the Treasury, to provide liquidity; the right for the Treasury to purchase equity in the GSEs, to provide capital; and a consultative role for the [[Federal Reserve System|Federal Reserve]] in a reformed GSE regulatory system.<ref name="Treasury-paulson-2008-07-13">

{{cite news | title= Suffering a seizure: America's government takes control of Freddie Mac and Fannie Mae | date= 2008-09-08 | publisher= The Economist | url = http://www.economist.com/finance/displaystory.cfm?story_id=12078933 | worknewspaper = [[The Economist.com]] | access-date = 2008-09-11 }}

The conservator, FHFA, signed the agreements on behalf of the GSEs.<ref name='USTreasury-GSE Stock Agreements-2008-09-09'>See the senior preferred stock and common stock warrant agreements disclosed by the Department of the Treasury on September 9, 2008:

The $100 billion amount for each GSE was chosen to indicate the level of commitment that the U.S. Treasury is willing to make to keep the financial operations and financial conditions solvent and sustainable for both GSEs. The agreements were designed to protect the senior and subordinatedsubordinate debt and the mortgage -backed securities of the GSEs. The GSEs' common stock and existing preferred shareholders will bear any losses ahead of the government. Among other conditions of the agreement, each GSE's retained mortgage and mortgage backed securities portfolio shall not exceed $850 billion as of December 31, 2009, and shall decline by 10% per year until it reaches $250 billion.<ref name= ' Treasury-GSE Senior Preferred Stock-2008'>

{{cite news | title= Fact Sheet: Treasury Senior Preferred Stock Purchase Agreement | date= 2008-09-07 | publisher= Office of Public Affairs, United States Department of the Treasury | url= http://www.treas.gov/press/releases/reports/pspa_factsheet_090708%20hp1128.pdf | access-date= 2008-09-07 | archive-url= https://web.archive.org/web/20080909184045/http://www.treas.gov/press/releases/reports/pspa_factsheet_090708%20hp1128.pdf | archive-date= September 9, 2008 | url-status= dead | df= mdy-all }}

# On September 8, 2008, the first business day of the conservatorship, business will be transacted normally, with stronger backing for the holders of [[Mortgage-backed security|mortgage-backed securities]] (MBS), [[senior debt]] and [[subordinated debt]].<ref name='FHFA-GSE contracts continuity-2008-09-07'>{{cite news|title=Statement of Federal Housing Finance Agency Regarding Contracts of Enterprises in Conservatorship |date=2008-09-07 |publisher=Federal Housing Finance Agency |url=http://www.ofheo.gov/media/PDF/FHFAStatementReContracts.pdf |access-date=2008-09-09 |url-status=dead |archive-url=https://web.archive.org/web/20080910105709/http://www.ofheo.gov/media/PDF/FHFAStatementReContracts.pdf |archive-date=September 10, 2008 }}

# Appointed as CEOs are [[Herbert M. Allison]] for Fannie Mae and [[David M. Moffett]] for Freddie Mac. Allison is a former Vicevice Chairmanchairman of [[Merrill Lynch]] and, for the last eight years, chairman of [[TIAA-CREF]]. Moffett is the former Vicevice Chairmanchairman and CFO of [[US Bancorp]]. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally strong non-executive chairmen.

# Other management actionactions will be very limited. The new CEOs agreed it iswas important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.

# There will be a financing and investinginvestment relationship with the U.S. Treasury via three different financing facilities to provide critically needed support to Freddie Mac and Fannie Mae, and also to the liquidity of the mortgage market. One of the three facilities is a secured liquidity facility, which will be not only for Fannie Mae and Freddie Mac, but also for the 12 Federal Home Loan Banks that are regulated by FHFA.

In addition to the government conservatorship, which CBO estimates will increase the federal government's net liabilities by $238 billion, several government agencies have taken steps to increase liquidity within Fannie Mae and Freddie Mac. Among these steps includes:<ref name='Committee for a Responsible Federal Budget: Stimulus Watch'>{{cite web |title=Committee for a Responsible Federal Budget: Stimulus Watch |url=http://www.usbudgetwatch.org/stimulus?filter0=**ALL**&filter1=82&filter2=**ALL**&filter3=**ALL** |date=2009-02-09 |access-date=February 9, 2009 |archive-url=https://web.archive.org/web/20090406064020/http://www.usbudgetwatch.org/stimulus?filter0=**ALL**&filter1=&filter2=79&filter3=68 |archive-date=April 6, 2009 |url-status=dead }}</ref>

# The Federal Reserve purchases of $24 billion in GSE debt.

The [[Congressional Budget Office]] director, [[Peter R. Orszag]] announced on September 9, 2008, that the CBO intended to incorporate the assets and liabilities of the two companies into their federal budget planning, due to the degree of government control over the entities.<ref name='Bloomberg-CBO-2008-09-11' /><ref name='Bloomberg-Faler-2008-09-12' />On September 12, 2008, White House Budget Director Jim Nussle indicated their budget plans would not incorporate the GSE debt into the budget because of the temporary nature of the conservator intervention.<ref name='Bloomberg-Faler-2008-09-12'>

Bloomberg reported that according to CMA Datavision of London that, "five-year credit-default swap contracts on U.S. government debt increased 3.5 [[basis points]] on September 9, 2008 to a record 18, up from 6 basis points in April," in reaction to concerns about the potential rise in U.S. debt from bailouts.<ref name='Bloomberg-CBO-2008-09-11' />

On May 8, 2013, Representatives [[Scott Garrett]] introduced the [[Budget and Accounting Transparency Act of 2014 (H.R. 1872; 113th Congress)]] into the [[United States House of Representatives]] during the [[113th United States Congress]]. The bill, if it were passed, would modify the budgetary treatment of federal credit programs, such as Fannie Mae and Freddie Mac.<ref name=1872cbo>{{cite web|title=H.R. 1872 - CBO|url=http://cbo.gov/sites/default/files/cbofiles/attachments/hr1872.pdf|publisher=United States Congress|access-date=28 March 2014}}</ref> The bill would require that the cost of direct loans or loan guarantees be recognized in the federal budget on a fair-value basis using guidelines set forth by the [[Financial Accounting Standards Board]].<ref name="1872cbo"/> The changes made by the bill would mean that Fannie Mae and Freddie Mac were counted on the budget instead of considered separately and would mean that the debt of those two programs would be included in the national debt.<ref name=Housepushbudgetreform>{{cite news|last=Kasperowicz|first=Pete|title=House to push budget reforms next week|url=httphttps://thehill.com/blogs/floor-action/economics-trade/202010-house-to-push-budget-reforms-next-week/|access-date=7 April 2014|newspaper=The Hill|date=28 March 2014}}</ref> These programs themselves would not be changed, but how they are accounted for in the [[United States federal budget]] would be. The goal of the bill is to improve the accuracy of how some programs are accounted for in the federal budget.<ref name=bringoutbudget>{{cite news|last=Kasperowicz|first=Pete|title=Next week: Bring out the budget|url=httphttps://thehill.com/blogs/floor-action/scheduling/202730-next-week-bring-out-the-budget/|access-date=7 April 2014|newspaper=The Hill|date=4 April 2014}}</ref>

Many commercial banks in the United States own Freddie and Fannie preferred shares. Those shares have had their dividends suspended, and are junior to the senior preferred stock issued to the Treasury in the restructuring of the two companies. The market value of the preferred shares plunged after the restructuring announcement and suspension of dividends. 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. banks.<ref name = 'Bloomberg-Shen-2008-09-08'>

In the [[credit default swap]] (CDS) market, the standard contracts typically used between parties to a swap define the action of placing Fannie Mae and Freddie Mac into conservatorship to beas equivalent to [[bankruptcy]], because of the change in management control. 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 (finance)|hedge]] or speculate on the potential risk that a company will default on its bonds. The two GSEs have approximately US$1.5 trillion in bonds outstanding, and since the market infor credit default swaps is not public, there is no central reporting mechanism to verify how many credit default swaps are linked to those bonds. One estimate floated is US$500 billion, and that the entire CDS market has a notionalnominal value in the vicinity of US$62 trillion.<ref name='Economist-Swaps Market-2008-09-11'>

{{cite news | title = Quite an event: Testing times for the swaps market | date = 2008-09-11 | url = http://www.economist.com/finance/displaystory.cfm?story_id=12209647 | worknewspaper =The Economist | access-date = 2008-09-11 }}

Settlement on the contracts, will likely be the largest in the market's decade-long history.{{update inline|date=July 2018}}<ref name='NYTimes-Reuters-Big Payments-2008-09-08'>

Credit-default swaps on Fannie and Freddie have been among the most actively traded in the several months leading up to the conservatorship. "Thirteen 'major' dealers of credit-default swaps agreed 'unanimously' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds," according to a memo circulated by the [[International Swaps and Derivatives Association]] (ISDA) after the conservatorship announcement.<ref name = 'Bloomberg-Biggadike-2008-09-08'>

The day after the conservatorship announcement, the International Swaps and Derivatives Association, which sets industry standardized contracts for [[financial derivatives]] and [[swap (finance)|swap]]s, announced it was working on a protocol on how to evaluate and settle Fannie Mae and Freddie Mac credit default swaps.<ref>{{cite web | title = ISDA to Publish Protocol for Fannie and Freddie | url = http://www.isda.org/press/press090808.html | work = (Press Release) | publisher = ISDA | date = 2008-09-08 | access-date = 2008-09-08 | archive-url = https://web.archive.org/web/20080913144416/http://www.isda.org/press/press090808.html | archive-date = September 13, 2008 | url-status = dead }}</ref> Most of these swaps were settled on October 6, 2008.<ref>{{cite web | title = ISDA ANNOUNCES SUCCESSFUL IMPLEMENTATION OF FANNIE MAE, FREDDIE MAC CDS PROTOCOL | url = http://www.isda.org/press/press100608.html | work = (Press Release) | publisher = ISDA | date = 2008-10-06 | access-date = 2009-08-05 | archive-url = https://web.archive.org/web/20081210061413/http://www.isda.org/press/press100608.html | archive-date = December 10, 2008 | url-status = dead }}</ref>

Paradoxically (in relation to typical experiences when a company issuing bonds has a "credit event"), the value of the two GSEsGSE bonds rose to the vicinity of par value after the conservatorship. This means, that some owners of swaps that were hedging against the risk of a bond default, may be worse off, since the value of the bonds may be higher than when they purchased the swap. Cash auctions are reported to be scheduled for October 2008 to settle CDS contracts in relation to the GSEs.<ref name = 'Economist-Swaps Market-2008-09-11' /><ref name='Financial Times-van Duyn-2008-09-11'>

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. The Governor of the [[Bank of Japan]] [[Masaaki Shirakawa]] stated, "We expect the action would lead to stabilize the U.S. [mortgage-backed securities] market, the financial market, and the international financial market." Governor of the [[People's Bank of China]], China's central bank, [[Zhou Xiaochuan]] stated, "From my point of view, this is positive".<ref>{{cite news |author1=Schneider, Howard |author2=Eunjung Cha, Ariana |title= Stock Markets Soar After Freddie, Fannie Bailouts |url= https://www.washingtonpost.com/wp-dyn/content/article/2008/09/07/AR2008090702834.html?hpid=topnews |worknewspaper= [[The Washington Post]] |date=2008-09-08 |access-date=2008-09-08 }}</ref>

Over 98% of Fannie's loans were payingpaid timelyon duringtime in 2008.<ref>Ivry, Bob; Lynch, Sharon L. [https://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aMz0dl3IdwjU "Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders"]. ''Bloomberg LP''. July 23, 2008.</ref> Both Fannie and Freddie had positive net worth as of the date of the takeover, meaning the value of their assets exceeded their liabilities. However, Fannie's total assets to capital (leverage ratio) was about 20:1, while Freddie's was about 70:1.<ref>[http://www.fanniemae.com/ir/pdf/earnings/2008/q22008.pdf "Fannie Q2 10Q Report"] {{webarchive|url=https://web.archive.org/web/20080909185126/http://www.fanniemae.com/ir/pdf/earnings/2008/q22008.pdf |date=September 9, 2008 }} (pdf). United States Securities and Exchange Commission. August 8, 2008.</ref><ref>[http://www.freddiemac.com/investors/er/pdf/financial-statements_080608.pdf "Freddie Mac Consolidated Statements of Income (Unaudited)"] {{Webarchive|url=https://web.archive.org/web/20080909185134/http://www.freddiemac.com/investors/er/pdf/financial-statements_080608.pdf |date=September 9, 2008 }}. Freddie Mac. August 6, 2008.</ref> These numbers increase significantly if one includes all the mortgage-backed assets they guaranteedguarantee. These ratios are considerably higher than investment banks, which leverage around 30:1.<ref>{{cite web|url=http://www.housingwire.com/2008/09/22/the-death-of-wall-street/|title=The Death of Wall Street|date=September 22, 2008|work=HousingWire.com|access-date=January 23, 2017|archive-date=March 16, 2012|archive-url=https://web.archive.org/web/20120316111914/http://www.housingwire.com/2008/09/22/the-death-of-wall-street/|url-status=dead}}</ref><ref>{{cite web|url=http://www.aol.com/finance/|title=AOL - Finance News & Latest Business Headlines|last=AOL|work=AOL.com|access-date=January 23, 2017}}</ref>

However, there was concern{{According to whom|date=January 2017}} that the GSEs' liquidity was insufficient to handle growing delinquency rates, such that although viable in September 2008, the scale of loss in the future would be sufficient that insolvency would occur and that knowledge of this future failure would induce immediate or near-immediate failure due to buyers refusing to buy debt. Both GSEs roll over large amounts of debt on a quarterly basis, and failure to sell debt would lead to failure due to lack of liquidity. A slower form of failure would be the issuing of debt at high cost (to compensate buyers for risk), which would greatly diminish the earning power of both GSEs, rendering them unable to earn the money they would need to handle expected future losses. Both GSEs counted large amounts of deferred tax assets towards their regulatory capital, which were considered by some{{Who|date=January 2017}} to be of "low quality" and not truly available capital. The deferred tax assets would only have value if the companies were profitable and could use the assets to offset future taxes. Both companies had experienced significant losses and were likely to face more over the next year or longer.<ref>[https://www.bloomberg.com/apps/news?pid=20601087&sid=a3pTtizqxtcA&refer=home Kopecki, Dawn. "Fannie Mae, Freddie 'House of Cards' Prompts Takeover". ''Bloomberg LP''. September 6, 2008.]</ref>

In testimony before a House Financial Services Committee subcommittee on June 3, 2009, Federal Housing Finance Agency Director James B. Lockhart III presented his report, "The Present Condition and Future Status of Fannie Mae and Freddie Mac.".<ref>{{cite web | title = The Present Condition and Future Status of Fannie Mae and Freddie Mac | author = James B. Lockhart III | url = http://www.fhfa.gov/webfiles/2708/FHFA_Director's_Testimony_Final.pdf | publisher = FHHA | date = June 3, 2009 | access-date = August 5, 2009 | archive-url = https://web.archive.org/web/20090612084805/http://www.fhfa.gov/webfiles/2708/FHFA_Director's_Testimony_Final.pdf | archive-date = June 12, 2009 | url-status = dead }}</ref> Highlights of the report include: the Treasury Department's commitment to fund up to $200 billion in capital for each enterprise is expected to be sufficient; the enterprises own or guarantee 56% of the single family mortgages in the [[USA]]United States, or $5.4 trillion of the total $11.9 trillion in outstanding mortgage debt; their combined share of mortgages originated in the first quarter of 2009 was 73%; private-label mortgage-backed securities (PLS) are a major driver of Enterpriseenterprise losses; both Enterprises are heavily involved in planning and implementing the Making Home Affordable and the Home Affordable Refinance programs. The report notes:

The report provides background on the origins of PLS and the riskrisks they present. PLS loans represent 15% of mortgages but 50% of serious delinquencies. 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 credit quality of investments in PLS has proven to be much worse than the initial AAA credit ratings of those securities would have suggested. The ongoing uncertainty surrounding the true economic value of PLS will continue to raise safety and soundness concerns.

The report notes the for-profit structure of the GSEs worked counter to prudent risk management as competition reduced both market share and profits, thus eroding the GSEs credit requirements. To maintain profitability, each Enterpriseenterprise increased purchases of PLS backed by alternative mortgages and of high-risk whole loans. And while many had criticized the OFHEO and sought to replace it:

The [[Presidency of George W. Bush|George W. Bush administration]] was prevented from taking official action due to Senate Bill 190 of the 109109th Congress never being allowed a full Senate vote, even though it was passed out of committee on a 13-9 vote along party lines (13 Republicans voted "Yesyes" and 9 Democrats voted "Nono"),.<ref>{{cite web|url=http://www.govtrack.us/congress/bill.xpd?bill=s109-190|title=Federal Housing Enterprise Regulatory Reform Act of 2005 (2005 - S. 190)|work=govtrack.us|access-date=January 23, 2017}}</ref> doingDoing so would have prevented Congress' home ownership goals from being realized. On June 16, 2010, it was announced that the two GSEs would have their shares delisted from the NYSE.<ref>{{cite web | title = Fannie Mae, Freddie Mac to delist from NYSE | author = Chris Isidore | url = https://money.cnn.com/2010/06/16/news/fannie_freddie_delisting/ | website = CNN Money | date = June 16, 2010 | access-date =June 19, 2010 }}</ref> An article from August 2012 in ''Bloomberg'' noted that the companies "have drawn $190 billion in aid and paid $46 billion in dividends since being taken over by U.S. regulators in 2008".<ref>{{cite news | title = U.S. Revises Payment Terms for Fannie Mae, Freddie Mac |author1=Cheyenne Hopkins |author2=Clea Benson | url = https://www.bloomberg.com/news/2012-08-17/treasury-accelerates-withdrawal-of-fannie-freddie-backing.html | publisher = Bloomberg | date = August 17, 2012 | access-date = October 4, 2012 }}</ref> CBS News reported on August 6, 2015, that Fannie Mae alone has paid a total of $142.5 billion in dividends since receiving a bailout of $116 billion in 2008.<ref>{{cite news | title = Fannie Mae posts $4.6B profit; paying $4.4B dividend | url = http://www.cbsnews.com/news/fannie-mae-posts-4-6b-profit-paying-4-4b-dividend/ | publisher = Associated Press | date = August 6, 2015 | access-date = January 8, 2016}}</ref> 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.<ref>{{cite news | title = Securities Fraud Lawsuit Dismissed Against Freddie Mac | author = Alan Zibel | url = https://www.wsj.com/articles/SB10000872396390443328404578022640377038654 | work = Wall Street Journal | date = September 27, 2012 | access-date = October 5, 2012 }}</ref> As of 2018, profits from Fannie Mae and Freddie Mac are still being sent to the Treasury Department.

* {{Cite book |title= The Origin of Financial Crises: Central banks, credit bubbles and the efficient market fallacy |last= Cooper |first= George |year= 2008 |publisher= Harriman House |location= Petersfield, Hampshire, U.K. |isbn= 978-1-905641-85-7 |pagespage= 208 |url= http://www.harriman-house.com/pages/book.htm?BookCode=263120 }}

*{{Cite news | url = https://www.wsj.com/public/resources/documents/info-flash08.html?project=PAULSON0808 | title = Fannie, Freddie and Henry | work = Wall Street Journal | date = 2008-09-09 | access-date = 2008-09-09 }} (InteractiveThe interactive timeline of Treasury Secretary Paulson's changing policy actions in relation to Fannie Mae and Freddie Mac – requires [[Adobe Flash|Flash]].)

[[Category:2000s in economic history]]