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{{Short description|Action by the U.S. Treasury to lessen the subprime mortgage crisis}}
{{Use American English|date=January 2017}}
{{Use mdy dates|date=January 2017}}
{{cleanup|reason=uses future tense for past events, needs update|date=March 2023}}
[[File:Fannie Mae Headquarters.JPG|200px|right|thumb|Fannie Mae headquarters at 3900 [[Wisconsin Avenue (Washington, D.C.)|Wisconsin Avenue]], NW in [[Washington, D.C.]]]]
{{cite news
|first=James B.
|last=Lockhart
|title=Statement of FHFA Director James B. Lockhart
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|date=September 7, 2008
|access-date=September 7, 2008
|
|
}}
</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
</ref>
As of 2022, 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.<ref>{{cite web |url=https://furmancenter.org/thestoop/entry/when-will-government-control-of-fannie-mae-and-freddie-mac-end-part-2 |title=When Will Government Control of Fannie Mae and Freddie Mac End? (Part 2) |publisher=NYC Furman Center Blog |date=25 July 2022 |author=Donald H. Layton}}</ref>
==Background and financial market crisis==
{{Main|
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
The conservatorship action has been described as "one of the most sweeping government interventions in private financial markets in decades"
</ref> and one that "could turn into the biggest and costliest government bailout ever of private companies".<ref name="NYTimes-Duhigg, Labaton & Sorkin-2008-09-07">
{{cite news |first= Charles |last= Duhigg
</ref>
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]
</ref><ref name= 'NYTimes-Sorkin-2008-09-14'>
{{cite news | first= Andrew Ross | last= Sorkin |author2=Jenny Anderson |author3=Ben White | title= In Frantic Day, Wall Street Banks Teeter | date= 2008-09-14
The 94-year-old [[Merrill Lynch]] accepted a purchase offer by [[Bank of America]] for approximately US$50 billion, a big drop from a year-earlier market valuation of about US$100 billion. A credit rating downgrade of the large insurer [[American International Group]] (AIG) led to a September 16, 2008 rescue agreement with the [[Federal Reserve Bank]] for a US$85 billion secured loan facility, in exchange for warrants for 79.9% of the equity of AIG.<ref name= "Federal Reserve-Press Release-2008-09-16">United States Federal Reserve Board of Governors, [http://www.federalreserve.gov/newsevents/press/other/20080916a.htm Press release: Federal Reserve Board, met with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to US$85 billion to the American International Group (AIG)], September 16, 2008</ref><ref name='Reuters-Kaiser-2008-09-17'>
{{cite news | first= Emily | last= Kaiser | title= After AIG rescue, Fed may find more at its door | date= 2008-09-17 |
</ref><ref name= 'NYT-Andrews-2008-09-16'>
{{cite news | first= Edmund
</ref><ref>
{{cite news |first=Eric |last=Dash |author2=Andrew Ross Sorkin |author3=Michael J. de la Merced |author4=David M. Herszenhorn |title=Throwing a Lifeline to a Troubled Giant |date=2008-09-17 |url=https://www.nytimes.com/2008/09/18/business/18insure.html?pagewanted=all |newspaper=The New York Times}}</ref>
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[[File:Fannie Mae Reston facility 1.jpg|thumb|right|Fannie Mae's Reston, Virginia, facility]]
The GSE business model has outperformed any other real estate business throughout its existence. According to the Annual Report to Congress,<ref>
By way of contrast, during 1991–2007, commercial banks' average annual loss rate on single-family mortgages was about 15 basis points.<ref>{{cite journal|url=http://research.stlouisfed.org/fred2/series/CORSFRMACBS|title=Charge-Off Rate on Single Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks
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,
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
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>
In 2005, the Federal Housing Enterprise Regulatory Reform Act,<ref>
== Federal Housing Finance Agency and Treasury authority ==
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,
{{cite news | first= David | last= Herszenhorn | title= Congress Sends Housing Relief Bill to President
| date= 2008-07-27
| work=The New York Times |
</ref><ref name='NYTimes-Herszenhorn-2008-07-31'>
{{cite news | first = David M. | last= Herszenhorn | title= Bush Signs Sweeping Housing Bill | date= 2008-07-31
</ref><ref>See HR 3221, signed into law as Public Law 110-289: ''A bill to provide needed housing reform and for other purposes.'' <br /> Access to Legislative History: Library of Congress THOMAS: [http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03221: A bill to provide needed housing reform and for other purposes.] {{Webarchive|url=https://web.archive.org/web/20080918041801/http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03221: |date=September 18, 2008 }} <br />White House pre-signing statement: [
▲See HR 3221, signed into law as Public Law 110-289: ''A bill to provide needed housing reform and for other purposes.'' <br /> Access to Legislative History: Library of Congress THOMAS: [http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03221: A bill to provide needed housing reform and for other purposes.] <br />White House pre-signing statement: [http://www.whitehouse.gov/omb/legislative/sap/110-2/saphr3221-h.pdf Statement of Administration Policy: H.R. 3221 – Housing and Economic Recovery Act of 2008 ] {{webarchive|url=https://web.archive.org/web/20080909183946/http://www.whitehouse.gov/omb/legislative/sap/110-2/saphr3221-h.pdf |date=September 9, 2008 }} (July 23, 2008). Executive office of the President, Office of Management and Budget, Washington DC.</ref>
===Prior GSE support measures===
The September 7 conservatorship was termed by ''The Economist'' as the "second" bailout of the GSEs.<ref name='Economist-Credit Blame-2008-09-11'>
{{cite news | title= Credit and blame: A must-read on the origins of the crisis | date= 2008-09-11
</ref> Prior to the enactment of the Housing and Economic Recovery Act of 2008, on July 13, 2008, Treasury Secretary [[Henry Paulson]] announced an effort to backstop the GSEs based on prior statutory authority, in coordination with the [[Federal Reserve Bank]]. That announcement occurred after a week in which the market values of shares of [[Fannie Mae]] and [[Freddie Mac]] fell almost by half (from a previously diminished value of approximately half of year-earlier market highs).<ref name = 'Washington Post-2008-07-14'>
{{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 |
</ref>
That plan contained three measures: an increase in the line of credit available to the GSEs from the Treasury
{{cite news | last = Paulson | first = Henry | date = 2008-07-13 | url =http://www.treasury.gov/press/releases/hp1079.htm | title = Paulson Announces GSE Initiatives | publisher = United States Department of the Treasury |
</ref>
On the same day, the Federal Reserve announced that the [[Federal Reserve Bank of New York]] would have the right to lend to the GSEs as necessary.<ref name = 'Federal Reserve Governors-2008-07-13'>
{{cite news | url = http://www.federalreserve.gov/newsevents/press/other/20080713a.htm | title = Press Release | publisher = Board of Governors of the [[Federal Reserve System]] | date = 2008-07-13 |
</ref>
==Capital infusion by the Treasury==
The agreement the Treasury made with both GSEs specifies that in exchange for future support and capital investments of up to US$100 billion in each GSE, at the inception of the conservatorship, each GSE shall issue to the Treasury US$1 billion of senior [[preferred stock]], with a 10% coupon, without cost to the Treasury.<ref name='Bloomberg-CBO-2008-09-11'>{{cite news |last=Kopecki |first=Dawn |work=Bloomberg |date=2008-09-11 |
{{cite news | title= Suffering a seizure: America's government takes control of Freddie Mac and Fannie Mae | date= 2008-09-08
</ref>
Also, each GSE contracted to issue common stock [[Warrant (finance)|warrants]] representing an ownership stake of 79.9%, at an exercise price of one-thousandth of a U.S. cent ($0.00001) per share, and with a warrant duration of twenty years.<ref name = 'USTreasury-GSE Stock Agreements-2008-09-09'/>
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:
* [http://www.treas.gov/press/releases/reports/seniorpreferredstockpurchaseagreementfnm1.pdf Fannie Mae Senior Preferred Stock] {{webarchive|url=https://web.archive.org/web/20080909184100/http://www.treas.gov/press/releases/reports/seniorpreferredstockpurchaseagreementfnm1.pdf |date=September 9, 2008 }}
* [http://www.treas.gov/press/releases/reports/certificatefnm2.pdf Fannie Mae Certificate] {{webarchive|url=https://web.archive.org/web/20080909184107/http://www.treas.gov/press/releases/reports/certificatefnm2.pdf |date=September 9, 2008 }}
* [http://www.treas.gov/press/releases/reports/warrantfnm3.pdf Fannie Mae Warrant for Common Stock] {{Webarchive|url=https://web.archive.org/web/20080909184046/http://www.treas.gov/press/releases/reports/warrantfnm3.pdf |date=September 9, 2008 }}
* [http://www.treas.gov/press/releases/reports/seniorpreferredstockpurchaseagreementfrea.pdf Freddie Mac Senior Preferred Stock] {{webarchive|url=https://web.archive.org/web/20080909183946/http://www.treas.gov/press/releases/reports/seniorpreferredstockpurchaseagreementfrea.pdf |date=September 9, 2008 }}
* [http://www.treas.gov/press/releases/reports/certificatefreb.pdf Freddie Mac Certificate] {{webarchive|url=https://web.archive.org/web/20080909184056/http://www.treas.gov/press/releases/reports/certificatefreb.pdf |date=September 9, 2008 }}
* [http://www.treas.gov/press/releases/reports/warrantfrec.pdf Feddie Mac Warrant for Common Stock] {{webarchive|url=https://web.archive.org/web/20080909184051/http://www.treas.gov/press/releases/reports/warrantfrec.pdf |date=September 9, 2008 }}</ref>
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
▲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 subordinated 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
</ref>
==FHFA initial actions as conservator==
In the September 6, 2008 conservatorship announcement, Lockhart indicated the following items in the plan of action for the Federal Housing Finance Agency conservatorship:<ref name = FHFA-Lockhart-2008-09-07/>
# 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 |
</ref>
# The [[Government-sponsored enterprise|Enterprises]] will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month, without capital constraints.
# As the conservator, the FHFA will assume the power of the Board and management.
# The present [[Chief executive officer|Chief Executive Officers]] (CEOs) of both Fannie Mae and Freddie Mac have been dismissed but will stay on to help with the transition.
# Appointed as CEOs are [[Herbert M. Allison]] for Fannie Mae and [[David M. Moffett]] for Freddie Mac. Allison is a former
# Other management
# To conserve over $2 billion annually in capital, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will remain outstanding. Subordinated debt interest and principal payments will continue to be made.
# All political activities, including all lobbying, will be halted immediately. Charitable activities will be reviewed.
# There will be a financing and
==Government support for Fannie Mae and Freddie Mac==
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 }}</ref>
# Federal Reserve purchases of $23 billion in GSE debt (out of a potential $100 billion) and $53 billion in GSE-held mortgage backed securities (out of a potential $500 billion).
# The Federal Reserve purchases of $24 billion in GSE debt.
# Treasury Department purchases of $14 billion in GSE stock (out of a potential $200 billion).
# Treasury Department purchases of $71 billion in mortgage backed securities
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=== National debt accounting ===
The on- or off-balance sheet obligations of the two GSEs, which are "independent" corporations rather than federal agencies, are just over $5 trillion, a significant amount when compared to the $9.5 trillion of officially reported [[United States public debt]] at the time of the takeover.<ref name='Fortune-Barr-2008-09-07'>
{{cite news | last = Barr | first = Colin | work = Fortune | date = 2008-09-07 |
url =
</ref>
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. Some observers see this as an effective nationalization of the companies that ultimately places taxpayers at risk for all their liabilities.<ref name= 'AP-Raum-2008-09-08' >
{{cite news | last = Raum | first = Tom | title = US rescue of Fannie, Freddie poses taxpayer risks | publisher = Associated Press
| url = https://www.usatoday.com/news/washington/2008-09-08-127573146_x.htm |
</ref>
The federal government follows specialized accounting standards set by the [[Federal Accounting Standards Advisory Board]]. 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.<ref name = 'USA Today-Armour-2008-09-07'>
{{cite news | first = Stephanie | last= Armour|author2=James R. Healey | title= Taxpayers take on trillions in risk in Fannie, Freddie takeover
</ref>
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
{{cite news | first= Brian | last= Faler | title= Fannie Mae, Freddie Mac to Be Kept Off Budget, White House Says | date= 2008-09-12 | publisher = Bloomberg LLP | url = https://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXJSThdqLsXg | work = Bloomberg.com |
▲ {{cite news | first= Brian | last= Faler | title= Fannie Mae, Freddie Mac to Be Kept Off Budget, White House Says | date= 2008-09-12 | publisher = Bloomberg LLP | url = https://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXJSThdqLsXg | work = Bloomberg.com | pages = | accessdate = 2008-09-12 }}
</ref>
Bloomberg reported that according to CMA Datavision of London
===Related legislation===
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|
==Market consequences==
===Bank reserves===
Many commercial banks in the United States own Freddie and Fannie preferred shares. Those shares have had their dividends suspended
Shen, Linda (September 8, 2008). [https://www.bloomberg.com/apps/news?pid=20601087&sid=a2trGkldcuzc&refer=worldwide Lenders With `Outsized' GSE Stakes May Need Capital], [[Bloomberg L.P.|Bloomberg]], Accessed 8 September 2008
</ref> 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.<ref>{{cite news|url=http://www.bizjournals.com/triangle/stories/2008/09/22/daily38.html|title=Gateway Bank turns to market for $40M|last=Weisbecker|first=Lee|
===Credit default swaps===
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
{{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 |
</ref><ref name='NYTimes-Reuters-Big Payments-2008-09-08'/>
Settlement on the contracts
{{cite news |
| date = 2008-09-08
</ref>
Credit-default swaps on Fannie and Freddie have been among the most actively traded in the several months leading up to the conservatorship. "Thirteen
{{cite news | last = Biggadike | first= Oliver |author2=Shannon D. Harrington | work = Bloomberg.com | publisher = Bloomberg | title= Fannie, Freddie Credit-Default Swaps May Be Settled (Update3) | url = https://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajsxbVS.W2lQ | date = 2008-09-08 |
</ref>
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 }}</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 }}</ref>
Paradoxically (in relation to typical experiences when a company issuing bonds has a "credit event"), the value of the two
{{cite news | first= Aline | last= Van Duyn | title= Insight: The adventure never ends in the derivatives Wonderland | date= 2008-09-11
| work = Financial Times |
</ref>
===September 2008 reactions to the seizure===
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
==Effects on the subprime mortgage crisis==
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|url=http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#ixzz12xTyWY91A
|date=2008-10-12
|publisher=
*Lower borrowing costs for banks typically increase the "spread" between the rate at which they borrow and which they lend. This increases bank profitability, shoring up bank liquidity and balance sheets further.
*Adjustable rate mortgage ([[Adjustable-rate mortgage|ARM]]) rates are reduced, which lowers pressure on homeowners and reduces foreclosures. Lower rates also encourage new home purchases.
*The government's role as the primary investor allows a systematic loan refinancing process to be implemented. This should enable rapid loan adjustments or workouts for homeowners, which have been facing bottlenecks due to the requirement to have various investors approve the adjustments.<ref>Schoen, John W. [http://www.
*The government can restructure mortgages so that the loan balance is reduced to the current market value, reducing the incentive for homeowners to "walk away" from the property.
*With home prices more stabilized, the value of mortgage-backed securities receives some upward support.
==Financial condition of Fannie and Freddie prior to takeover==
Over 98% of Fannie's loans were
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>
==Ongoing status of Fannie and Freddie conservatorship==
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
<blockquote>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. While those are historically high levels, they compare favorably to industry averages of 4.7% for all prime loans, 7.2% for all single-family mortgages, 24.9% for all subprime mortgages, and 36.5% for subprime adjustable rate mortgages</blockquote>
The report provides background on the origins of PLS and the
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
<blockquote> Purchases of PLS ultimately proved disastrous for the Enterprises. Credit and market-value losses would have been even larger had the Office of Federal Housing Enterprise Oversight (OFHEO), one of FHFA's predecessor agencies, not increased the Enterprises' capital requirement by 30% and capped their asset portfolios because of accounting and control problems. </blockquote>
The [[Presidency of George W. Bush|George W. Bush administration]] was prevented from taking official action due to Senate Bill 190 of the
{{main|Collins v. Mnuchin}}
Shareholders of Fannie Mae and Freddie Mac have challenged the net worth profit taking by the government, in part by challenging the structure of the FHFA. They argued that the FHFA, as established by Congress, has a director that can only be removed "for cause" and not "at will.". The [[United States Court of Appeals for the Fifth Circuit|Fifth Circuit Court of Appeals]] sided with the shareholders both on its initial hearing and in an ''en banc'' review. 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. The Court heard oral arguments to this case on December 9, 2020.<ref>{{cite web | url = https://www.wsj.com/amp/articles/supreme-court-weighs-u-s-profit-sweep-at-fannie-freddie-11607522400 | title = Supreme Court Weighs U.S. Profit Sweep at Fannie, Freddie | first1 = Andrew | last1 = Ackerman | first2 = Brent | last2 = Kendall | date = December 9, 2020 | access-date = December 9, 2020 | work = [[The Wall Street Journal]] }}</ref>
==See also==
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;Background and reaction
*{{Cite news | first= Keven | last= Quealy |author2=Dylan Loeb McClain | title= A Year of Heavy Losses | date= September 15, 2008
* {{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 |
*{{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 |
{{Subprime mortgage crisis}}
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{{DEFAULTSORT:Federal Takeover Of Fannie Mae And Freddie Mac}}
[[Category:United States government
[[Category:Finance in the United States]]
[[Category:Debt]]
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[[Category:Structured finance]]
[[Category:Subprime mortgage crisis]]
[[Category:2000s in economic history]]
[[Category:2008 in American politics]]
[[Category:Fannie Mae]]
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