Determining the fate of Fannie Mae and Freddie Mac
Before the recent financial crisis, Fannie Mae and Freddie Mac held roughly $1.6 trillion in debt, almost one-third of the total corporate debt in the entire U.S. economy. Fannie and Freddie, the two housing Government-Sponsored Enterprises, purchase mortgages from lenders, bundle them into groups of mortgages and then sell shares of the groups of mortgages (mortgage-backed securities) to the private market in a process known as securitization. They also hold a significant number of loans in their own portfolios.
Fannie and Freddie failed when the housing economy collapsed, leaving U.S. taxpayers on the hook for more than $180 billion in mortgage-related losses. Lack of meaningful regulation and significant undercapitalization led to their failure, and due to the implicit guarantee that the federal government would never let these GSEs fail, Fannie and Freddie had to be placed into conservatorship in late 2008, during the height of the financial crisis. Together, the GSEs own or guarantee more than half of the $10 trillion U.S. mortgage market. The conservatorship dramatically increased the risks to the government--and taxpayers--because the government has now taken full responsibility for the GSEs' liabilities.