Federal Takeover of Fannie Mae and Freddie Mac - Ongoing Status of Fannie and Freddie Conservatorship

Ongoing Status of Fannie and Freddie Conservatorship

In testimony before a House Financial Services Committee subcommitee 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”. Highlights of the report include, the Treasury Department’s commitment to fund up to $200 billion in capital for each Enterprise is expected be sufficient; the Enterprises own or guarantee 56% of the single family mortgages in this country, 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 Enterprise losses; both Enterprises are heavily involved in planning and implementing the Making Home Affordable and the Home Affordable Refinance programs. The report notes:

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

The report provides background on the origins of PLS and the risk they present. PLS loans represent only 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 only 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 marketshare and profits, thus eroding the GSEs credit requirements. To maintain profitability, each Enterprise 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:

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.

The George W. Bush administration was prevented from taking official action due to Senate Bill 190 of the 109 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 "Yes" and 9 Democrats voted "No"), doing so would have prevented Congress' home ownership goals being realized.

On June 16, 2010, it was announced that the two GSEs would have their shares delisted from the NYSE.

An article from August of 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"

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.