Federal takeover of Fannie Mae and Freddie Mac: Causes and Consequences

The federal takeover of Fannie Mae and Freddie Mac was a pivotal moment in the 2008 financial crisis. The two government-sponsored enterprises (GSEs) were placed into conservatorship by the Federal Housing Finance Agency (FHFA) on September 6, 2008.

The takeover was a response to the growing financial instability of the two companies, which had become increasingly dependent on government support. Fannie Mae and Freddie Mac had been major players in the mortgage market, but their business model was unsustainable.

The takeover led to a significant shift in the mortgage market, with the two companies' shares being placed in conservatorship. This move was seen as a necessary step to prevent a complete collapse of the financial system.

Prior to the conservatorship of Fannie Mae and Freddie Mac, the Treasury Secretary, Henry Paulson, announced a plan to backstop the GSEs on July 13, 2008.

This plan included increasing the line of credit available to the GSEs from the Treasury to provide liquidity, and the Treasury was given the right to purchase equity in the GSEs to provide capital.

The Federal Reserve also announced that the Federal Reserve Bank of New York would have the right to lend to the GSEs as necessary on the same day.

A week before this announcement, 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.

This effort was made in coordination with the Federal Reserve Bank and was based on prior statutory authority.

The federal takeover of Fannie Mae and Freddie Mac was a significant move by the government to stabilize the housing market.

The Housing and Economic Recovery Act of 2008 enabled the Federal Housing Finance Agency (FHFA) to have expanded regulatory authority over Fannie Mae and Freddie Mac. This law also raised the Treasury's debt ceiling by $800 billion, to a total of $10.7 trillion.

The U.S. Treasury Department announced the government would take over Fannie Mae and Freddie Mac on September 7, 2008. The government's goal was to stabilize the housing market and end questions about the firms' finances.

The Treasury Department provided billions of dollars to shore up the mortgage giants, with the Federal Reserve purchasing $23 billion in GSE debt and $53 billion in GSE-held mortgage-backed securities.

The government conservatorship, which CBO estimates will increase the federal government's net liabilities by $238 billion, included several steps to increase liquidity within Fannie Mae and Freddie Mac.

Here are some of the government's actions to stabilize the firms:

The federal government's takeover of Fannie Mae and Freddie Mac had significant implications for consumers, with many wondering what this meant for their mortgages.

The financial impact of the federal takeover of Fannie Mae and Freddie Mac was significant, with the two GSEs having outstanding more than $5 trillion in mortgage-backed securities and debt, including $1.6 trillion in debt alone.

The Treasury committed to investing up to $200 billion in preferred stock and extending credit to keep the GSEs solvent and operating, which was described as "one of the most sweeping government interventions in private financial markets in decades".

The takeover was a response to the combined GSE losses of $14.9 billion and market concerns about their ability to raise capital and debt, which threatened to disrupt the U.S. housing financial market.

The government's support for the soundness of the obligations and guarantees on securities issued by Fannie and Freddie helped to enhance market liquidity in the mortgage market, allowing banks to increase lending and lower interest rates.

Here are some ways the government's support helped to stabilize the mortgage market:

The subprime crisis had a significant impact on the housing market, and the government's takeover of Fannie and Freddie helped to stabilize it. The crisis was caused by the failure of subprime mortgage loans, which accounted for 70% of all subprime loans insured by Fannie and Freddie in 2006.

The government's takeover of Fannie and Freddie helped to keep the mortgage market liquid, which lowered interest rates and allowed banks to increase lending. This improved liquidity in the mortgage market, making it easier for people to buy homes.

One of the key effects of the crisis was the increase in foreclosures, which put pressure on homeowners and reduced their ability to stay in their homes. However, the government's takeover of Fannie and Freddie helped to reduce ARM rates, which lowered pressure on homeowners and reduced foreclosures.

To illustrate the impact of the crisis, consider the following:

The government's takeover of Fannie and Freddie also helped to restructure mortgages, reducing the incentive for homeowners to "walk away" from their properties. This helped to stabilize home prices and reduce the value of mortgage-backed securities.

The national debt accounting for the United States took a significant hit in 2008, with the government's takeover of Fannie Mae and Freddie Mac adding a whopping $5 trillion to the country's debt.

The two companies, which are essentially independent corporations rather than federal agencies, had on- or off-balance sheet obligations that exceeded $5 trillion, dwarfing the $9.5 trillion of officially reported public debt at the time.

The government's conservatorship of the two companies and the planned Treasury infusion of capital support the senior liabilities, subordinated indebtedness, and mortgage guarantees of the firms.

This move effectively nationalized the companies, placing taxpayers at risk for all their liabilities. The federal government's accounting standards, set by the Federal Accounting Standards Advisory Board, make it difficult to determine the net exposure to taxpayers.

The Congressional Budget Office director, Peter R. Orszag, announced that the CBO would incorporate the assets and liabilities of the two companies into their federal budget planning due to the degree of government control over the entities.

However, White House Budget Director Jim Nussle indicated that their budget plans would not incorporate the GSE debt into the budget because of the temporary nature of the conservator intervention.

This discrepancy highlights the complexity of national debt accounting and the challenges of accurately measuring the impact of government interventions on the country's financial health.

The potential rise in U.S. debt from bailouts sparked concerns, causing five-year credit-default swap contracts on U.S. government debt to increase by 3.5 basis points to a record 18 in September 2008.