Fannie Mae's and Freddie Mac's Financial Problems (CRS Report for Congress)
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| Release Date |
Revised Aug. 10, 2012 |
| Report Number |
RL34661 |
| Report Type |
Report |
| Authors |
N. Eric Weiss, Specialist in Financial Economics |
| Source Agency |
Congressional Research Service |
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Summary:
The decision to place Fannie Mae and Freddie Mac in conservatorship raises questions about their impact on the housing and finance markets. To a certain extent, the housing, mortgage, and even general financial markets are in an unprecedented situation. This action by their new regulator, the Federal Housing Finance Agency (FHFA), came after turmoil in the housing, mortgage, and financial markets has raised doubts about the future of Fannie Mae and Freddie Mac, which are chartered by Congress as government-sponsored enterprises (GSEs) and were widely believed to have an implicit guarantee from the federal government. The Treasury will buy mortgage-backed securities from the GSEs and raise funds for them. Each GSE gave Treasury $1 billion in senior preferred stock and warrants to acquire, at nominal cost, 80% of each GSE. Treasury pledged to invest up to $100 billion in each GSE, and committed to invest more if necessary. Now the formerly implicit guarantee is nearly explicit. The Federal Reserve earlier took actions to allow Fannie and Freddie to borrow directly from the discount window, a privilege normally available only to primary securities dealers and banks that are member of the Federal Reserve System. The Securities and Exchange Commission has issued an emergency order restricting short selling of Fannie and Freddie's stock. The FHFA replaced the Office of Federal Housing Enterprise Oversight (OFHEO) as the GSEs' safety and soundness regulator. OFHEO repeatedly assured investors that Fannie and Freddie have adequate capital, but as highly leveraged financial intermediaries, Fannie Mae and Freddie Mac had limited capital to cushion them against losses. This report will be updated as warranted.
