• Fannie and Freddie Face Their Fates
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  • The 2008 global financial crisis brought about a number of historic market interventions. Most are now fodder for the history books: emergency loans have been repaid and stimulus funds spent. But one vestige remains. The agencies that support the U.S. mortgage market are still under the control of the federal government. Reform has been a long time in coming, but we may soon see an end to this prolonged chapter.

    The Federal National Mortgage Association, or Fannie Mae, dates back to 1938. It sprang from a New Deal program to support home sales by purchasing mortgages from lenders. In 1970, as the practice of bundling mortgages loans into securities began to take off, Fannie Mae became a private corporation. The government launched the Federal Home Loan Mortgage Corporation, or Freddie Mac, to compete with Fannie.



    As the mortgage market scaled up, so did the agencies’ importance. Through financial innovation and legislative reforms in the 1980s, mortgages ceased to be long-dated assets held on bank balance sheets. Mortgage-backed securities (MBS) allowed originators to resell mortgage notes to willing investors. Fannie and Freddie guaranteed the performance of these instruments. Though they were chartered as private institutions, both had credit lines from the U.S. Treasury, and many investors assumed the agencies had the backing of the U.S. government.

    Though the mortgage boom is now often viewed with regret, its excesses grew naturally from the missions of the agencies and the direction of regulators. Homeownership is a worthy individual and public policy goal. Homeowners gain a vehicle for long-term savings, and their commitment leads them to develop deeper roots within their communities. Policies such as the 1977 Community Reinvestment Act encourage lending to aspirational borrowers. The financial conduits afforded by these government-sponsored entities (GSEs) helped to make mortgage finance available to more consumers. In hindsight, it may have gone too far, with the U.S. reaching a peak of 69% home ownership in 2005.

    As they grew, Fannie and Freddie crept beyond the scope of their initial charters. They were intended to be pass-through vehicles for mortgage debt, but they started to carry greater amounts of mortgage debt on their own books. They ventured beyond owner-occupied housing and into multi-family financing. Along the way, they operated with low capital levels inconsistent with the risks of home lending. Once the crisis struck, the agencies were at risk of failure.