The Rescue of Fannie Mae and Freddie Mac

Abstract

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. 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 estate and moral hazard incentives emanating from the implicit guarantee of their liabilities. We describe the financial distress experienced by the two firms, the events that led the federal government to take dramatic action in an effort to stabilize housing and financial markets, and the various resolution options available to US policymakers at the time; and we evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage supply, and on the financial position of the two firms themselves. Conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution, and more than six years later, Fannie Mae and Freddie Mac still remain in conservatorship.