Fannie Mae and Freddie Mac have long played crucial roles in the U.S. mortgage market, creating financial products that support the market and reduce risks for investors. Established as government-sponsored enterprises (GSEs), these entities were thrust into the spotlight during the 2008 global financial crisis when they were placed under government conservatorship. As discussions about their potential return to private ownership intensify, stakeholders are weighing the benefits and risks of such a move.
In September 2008, as the global financial crisis escalated, Fannie Mae and Freddie Mac faced severe financial distress. To stabilize them, the U.S. Treasury Department extended $100 billion lines of credit to each firm. This intervention was crucial as the housing market crumbled, with an estimated 3.8 million homes lost to foreclosure between 2007 and 2010, according to the Federal Reserve Bank of Chicago.
Fannie Mae, originally chartered as a government agency in 1938 and privatized in 1968, along with Freddie Mac, created as a private company by Congress in 1970, became financially dependent on the government. Their stocks plummeted to near worthlessness, and the Treasury initiated profit sweeps to recover bailout funds. Over the years, Fannie and Freddie paid $301 billion back to the Treasury.
The government ended the profit sweeps in 2019, signaling a shift toward privatization. Despite this, concerns about their financial stability remain. The two mortgage giants were leveraged at about 1,000-1, indicating minimal capital reserves. Mark Calabria, former director of the Federal Housing Finance Agency, expressed concerns about privatization's implications for taxpayers.
"While I am optimistic about the overall state of the economy, are we putting the taxpayer at risk?" – Mark Calabria
As discussions continue, economic experts like Mark Zandi suggest that without a government backstop, mortgage rates could rise by 60 to 90 basis points. However, proponents of privatization argue that it might not lead to increased rates. Some even believe it could result in a decrease.
"In my mind that was a good decision" – Mark Zandi