The Rescue of Fannie Mae and Freddie Mac
W. Scott Frame, Andreas Fuster, Joseph Tracy, and James Vickery
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 US 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 fulfill a public mission: to enhance the liquidity
and stability of the US secondary mortgage market and thereby promote access
to mortgage credit, particularly among low- and moderate-income households and
neighborhoods. Their federal charters provide important competitive advantages
that, taken together, implied US 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 at some point, owing to their singular exposure to residential real
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In 1992, Congress created a two-part regulatory structure to monitor Fannie Mae
and Freddie Mac for compliance with their statutory missions and to limit their risktaking.
Mission regulation was assigned to the US Department of Housing and Urban
Development (HUD), while safety-and-soundness regulation became the purview of a
newly created Office of Federal Housing Enterprise Oversight (OFHEO) as an independent
agency within HUD. Congressional placement of OFHEO within HUD can
be viewed as a signal that the housing mission goals were the more important priority.
The principal manifestation of mission regulation for Fannie Mae and Freddie
Mac was the establishment of affordable housing goals. These goals stipulated
minimum percentages of mortgage purchases that finance dwellings in underserved
areas and for low- and moderate-income households (see Bhutta 2012 for more
details). The goals were progressively increased between 1996 and 2007; for example,
the target purchase percentage for low-and-moderate income households was raised
from 40 percent to 55 percent during this period. This provided political cover for
Fannie Mae and Freddie Mac to expand their business and take on greater risk.
As the safety-and-soundness regulator, OFHEO was authorized to set risk-based
capital standards (subject to important statutory limitations), conduct financial
examinations, and take certain enforcement actions. However, OFHEO lacked the
authority to adjust minimum capital requirements, which were set by statute at very
low levels: the sum of 2.5 percent of on-balance sheet assets and 0.45 percent of credit
guarantees for agency mortgage-backed securities held by outside investors. The new
regulator did not have receivership authority in the event of a failure of either Fannie
Mae or Freddie Mac. Finally, OFHEO was subject to the Congressional annual appropriations
process and therefore periodically fell victim to political meddling. These
and other regulatory deficiencies became clear to many observers (for example,
Frame and White 2004 and references therein) but were not addressed until the
passage of the Housing and Economic Recovery Act in July 2008.
