Fannie Mae and Freddie Mac are stockholder-owned, government-sponsored enterprises (GSEs), which purchase existing mortgages and pool the mortgages into mortgage-backed securities (MBSs), which they guarantee will be paid on time. The GSEs either keep the MBSs as an investment or sell the MBSs to investors. Their congressional charters give the GSEs a special relationship with the federal government, and it is widely believed that the federal government implicitly guarantees their $808 billion in bonds and $4.6 trillion in MBSs. Their charters give these GSEs special public policy goals aimed at providing liquidity in the mortgage market and promoting homeownership for underserved groups and locations. In 2008, the GSEs' financial condition had weakened, and there were concerns over their ability to meet obligations. On September 7, 2008, the Federal Housing Finance Agency (FHFA) took control of these GSEs from their stockholders and management in a process known as conservatorship. Congressional interest in Fannie Mae and Freddie Mac has increased in recent years, primarily because the federal government's continuing conservatorship of these GSEs has raised doubts about their future and concerns about the potential cost of supporting them. Other reasons for congressional concern include the large role that the GSEs and government-guaranteed mortgages (such as those guaranteed by the Federal Housing Administration) play in the overall mortgage market and Treasury's contract to purchase up to $200 billion in special senior preferred stock from each GSE. A glossary of terms is included at the end of this report. These factors will not contribute as much to the GSEs' profits going forward. How Much Have the GSEs Paid to Treasury in Dividends? If there are no profits, there is no payment. Previously each GSE made quarterly payments on a 10% annual dividend on the senior preferred stock regardless of profits or losses earned in the quarter. Has the Profit Sweep Increased the GSEs' Dividend Payments to Treasury? If the profit sweep had not replaced paying dividends to Treasury at a 10% annual rate, Fannie Mae would have paid $69 billion and Freddie Mac would have paid $47 billion to Treasury in dividends. In addition, HERA requires the GSEs to contribute to the HOPE Reserve Fund, the Housing Trust Fund, and the Capital Magnet Fund. The GSEs guarantee timely payment of principal and interest of the mortgages to MBS investors. In August 2012, the GSEs agreed to reduce their portfolios to $250 billion each by 2018. Like all other businesses, the GSEs have operational risk due to the failure of internal controls. If Treasury were to exercise these warrants, current common stockholders would own 20% of the enterprises. Currently, the profit sweep prevents them from accumulating capital. Neither GSE has required Treasury's support since the second quarter of 2012. When they went into conservatorship, each of the GSEs paid Treasury $1 billion of senior preferred stock for the promise of future financial support. What Other Actions Has the Federal Government Taken to Address the Financial Condition of the GSEs?
Fannie Mae and Freddie Mac are chartered by Congress as government-sponsored enterprises (GSEs) to provide liquidity in the mortgage market and to promote homeownership for underserved groups and locations. They purchase mortgages, guarantee them, and package them in mortgage-backed securities (MBSs), which they either keep as investments or sell to institutional investors. In addition to the GSEs' explicit guarantees, investors widely believe that MBSs are implicitly guaranteed by the federal government.
In 2008, the GSEs' financial condition had weakened and there were concerns over their ability to meet their obligations on $1.2 trillion in bonds and $3.7 trillion in MBSs that they had guaranteed. In response to the financial risks, the federal government took control of these GSEs in a process known as conservatorship as a means to stabilize the mortgage credit market. The GSEs accepted going into conservatorship, and Treasury agreed to provide up to $200 billion each to keep them solvent.
The GSEs agreed to pay Treasury a 10% cash dividend on funds received. If the GSEs do not have sufficient cash, they can pay Treasury a 12% dividend in special stock. Dividends were suspended for all other stockholders. If the GSEs had enough profit at the end of the quarter, the dividend came out of the profit. When the GSEs actually did not have enough cash to pay their dividend to Treasury, they asked for additional cash to make the payment instead of issuing additional stock. In August 2012, the 10% dividend was replaced with a "profit sweep" dividend. Under the profit sweep, Treasury received all of the profits above a declining capital reserve, but if there was no profit, there was no dividend.
The GSEs have paid dividends totaling $246 billion to Treasury. The majority of this sum—$191 billion—has been paid under the profit sweep. Paying the federal government all profits earned in a quarter prevents the GSEs from accumulating funds to redeem the senior preferred stock, which is held only by Treasury.
The GSEs have not taken a draw on their support from Treasury since the second quarter of 2012.
Congressional interest in Fannie Mae and Freddie Mac has increased in recent years, primarily because of the federal government's continuing conservatorship of these GSEs. Uncertainty in the housing, mortgage, and financial markets has raised doubts about the future of the enterprises and the potential cost to the Treasury of guaranteeing the enterprises' debt. Since more than 60% of households are homeowners, a large number of citizens could be affected by the future of the GSEs. Congress exercises oversight over the Federal Housing Finance Agency (FHFA), which is both regulator and conservator of the GSEs, and is considering legislation to shape the future of the GSEs.