Fannie Mae and Freddie Mac:
Analysis of Options for Revising the Housing Enterprises' Long-term Structures
GAO-10-144T, Oct 8, 2009
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This testimony discusses the results of our recently issued report on options for restructuring two government-sponsored enterprises (GSE): Fannie Mae and Freddie Mac (enterprises). On September 6, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac in conservatorship out of concern that their deteriorating financial condition and potential default on $5.4 trillion in financial obligations threatened the stability of financial markets. Since then, the Department of the Treasury (Treasury) has provided nearly $100 billion to the enterprises, and the Congressional Budget Office (CBO) estimated that the total cost of Treasury financial assistance will be nearly $400 billion. Moreover, the Board of Governors of the Federal Reserve System (Federal Reserve) has committed to purchasing up to $1.45 trillion in the debt and securities of the enterprises (and other entities) to support housing finance, housing markets, and financial markets. While the conservatorships can remain in place as efforts are undertaken to stabilize the enterprises and restore confidence in financial markets, FHFA said that the conservatorships were not intended to be permanent. Over the longer term, Congress and the executive branch will face difficult decisions on how to restructure the enterprises and promote housing opportunities while limiting risks to taxpayers and the stability of financial markets. This testimony will will (1)summarize the enterprises' performance in achieving key housing mission objectives; (2) identify various options for revising the enterprises' long-term structures; (3) analyze these options in terms of their potential capacity to achieve key housing mission and safety and soundness objectives; and (4) discuss how the federal government's management of the conservatorships and response to the housing crisis could affect any transition.
It is generally accepted that the enterprises were successful in achieving key housing mission objectives to support the secondary mortgage market and facilitate the flow of mortgage credit: (1) We reported that the enterprises established a viable mortgage market for secondary loans that enabled capital to flow to areas with the greatest demand for mortgage credit. (2) The enterprises' activities have been credited with lowering interest rates on qualifying mortgages below what they otherwise would have been, although estimates regarding the extent of this benefit vary.6 (3) Furthermore, the enterprises established underwriting practices and forms for conventional mortgages that became standard in the industry, increased the efficiency of underwriting, and helped develop the MBS market. However, it is not clear to what extent the enterprises have been able to support a stable and liquid secondary mortgage market during periods of economic stress, which is another key objective. The enterprises' mixed records in achieving their housing mission objectives and the losses and weaknesses that resulted in the conservatorships reinforce the need for Congress and the executive branch to fundamentally reevaluate the enterprises' roles, structures, and business activities in mortgage finance. Researchers and others believe a range of options could better achieve housing mission objectives (in some cases through other federal entities such as FHA), help ensure safe and sound operations, and minimize risks to financial stability. These options generally fall along a continuum, with some overlap among key features, and advocate (1) establishing a government corporation or agency, (2) reconstituting the enterprises as for-profit GSEs in some form, or (3) privatizing or terminating them. We sought to assess each restructuring option in terms of its capacity to meet key housing objectives (providing liquidity and support to mortgage markets and facilitating housing opportunities for targeted groups) while also mitigating safety and soundness and financial stability risks. Our analysis indicates that each option involves important trade-offs. Although it is not possible to predict what effects federal initiatives to respond to the housing crisis and the Treasury agreements with the enterprises could have on any transition, they could be substantial. For example, under the proposal to reconstitute the enterprises, potential investors might not be willing to invest in reconstituted GSEs that had a substantial volume of nonperforming mortgage assets or financial obligations to Treasury. To minimize this risk, the federal government could retain nonperforming assets in a "bad bank," spin off the performing assets to a "good bank," and devolve key functions, such as issuing MBS, to investors in a reconstituted GSE. Or, the federal government could use this process to terminate or privatize the enterprises. However, to the extent that the enterprises previously engaged in activities or incurred financial obligations inconsistent with maintaining long-term financial viability, the level of nonperforming assets and long-term costs to taxpayers may be higher than otherwise would be the case.