March 27th, 2015
from the New York Fed
The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation - commonly known as Fannie Mae and Freddie Mac - was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the U.S. housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt.
Fannie Mae and Freddie Mac are publicly held financial institutions that were created by Acts of Congress to fulfil a public mission: to enhance the liquidity and stability of the U.S. secondary mortgage market and thereby promote access to mortgage credit, particularly among lowand-moderate income households and neighborhoods. Their federal charters provide important competitive advantages that, taken together, long implied U.S. taxpayer support of their financial obligations. As profit maximizing firms, Fannie Mae and Freddie Mac leveraged these advantages over the years to become very large, very profitable, and very politically powerful. The two firms were often cited as shining examples of public-private partnerships -- that is, the harnessing of private capital to advance the social goal of expanding homeownership.
But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities (for a detailed discussion see Acharya et al. 2011). A purposefully weak regulatory regime was another important feature of the flawed design. While the structural problems with Fannie Mae and Freddie Mac were understood by many, serious reform efforts were portrayed as attacks on the American Dream and hence politically unpalatable.