	Introduction

The federal government's role in the mortgage market dates to the Depression, when Fannie Mae (officially the Federal National Mortgage Association) and the Federal Housing Administration (FHA, which is part of the Department of Housing and Urban Development, HUD) were created. Many consider its role to be substantial: Fannie Mae, Freddie Mac (which Congress created as the Federal Home Loan Mortgage Corporation in 1970), and Ginnie Mae (officially, the Government National Mortgage Association and part of HUD) guarantee virtually all of the mortgage-backed securities (MBS) newly issued. With slightly less than $10 trillion in mortgages outstanding, the residential mortgage market is of central importance both to households and to lenders. As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac have special privileges and obligations, though they are corporate entities with shareholders. Broadly speaking, the GSEs' role is to ensure appropriate availability of mortgages to creditworthy households. By law, the GSEs purchase mortgages from lenders, and either hold the mortgages as investments or pool the mortgages into MBS, which are sold to institutional investors. The GSEs guarantee that investors in these MBS will receive timely payment of principal and interest even if the borrower becomes delinquent. Their congressional charters give them a close relationship to the federal government that is widely (but not universally) viewed as providing an implicit federal guarantee of their bonds and MBS. In September 2008, the GSEs individually agreed with their regulator, the Federal Housing Finance Agency (FHFA), that unexpected mortgage delinquencies and resulting losses jeopardized their solvency. The GSEs agreed to direct government control, known as conservatorship, which is the equivalent of bankruptcy reorganization for financial companies. As part of the agreement to conservatorship, Treasury agreed to provide financial support to keep the GSEs solvent. The agreement has been amended three times. It currently requires Treasury to provide, as needed, up to an additional $125 billion to Fannie Mae and an additional $149 billion to Freddie Mac. At the end of 2012, the Federal Reserve and Treasury held $821 billion of Fannie Mae's and Freddie Mac's MBS. The 113 th Congress continues deliberation started in earlier Congresses as to how and when to unwind the federal control of Fannie Mae and Freddie Mac, and what (if any) is the proper role of the federal government in the nation's mortgage markets. Some proposals called for reducing the government's support of Fannie Mae and Freddie Mac, selling off their assets, and revoking their congressional charters. Other proposals concentrated not so much on unwinding Fannie Mae and Freddie Mac, as on replacing them with new institutions. Arguably, the GSEs have led to many changes in the nation's mortgage markets that have improved efficiency and consumer choice, including
standardizing mortgages, which has contributed to economies of scale and lower interest rates for homeowners; automating and standardizing underwriting, which has reduced the cost of obtaining a home mortgage; making widespread certain features such as assumable mortgages and mortgages without prepayment penalties, both of which facilitate refinancing; tapping new sources of funding including pension funds, trusts, and international investors, which has led to lower mortgage interest rates; eliminating state and local mortgage interest rate differentials, which has lowered mortgage rates in some parts of the nation, but possibly increased them in others; innovating in affordable housing and equal housing opportunity; and creating a liquid secondary mortgage market, which has lowered mortgage interest rates.
The federal government's role in the mortgage market dates to the Depression and is considered by many to be substantial: Fannie Mae, Freddie Mac, and Ginnie Mae (officially the Government National Mortgage Association, which is part of the Department of Housing and Urban Development) together guarantee virtually all new mortgage-backed securities (MBS). With slightly less than $10 trillion in mortgages outstanding, the residential mortgage market is of central importance both to households and to lenders.
As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac have special privileges and obligations. Their congressional charters give them a close relationship to the federal government that is widely (but not universally) viewed as an implicit federal guarantee of their bonds and MBS. Broadly speaking, their role is to ensure appropriate availability of mortgages to creditworthy households. By law, the GSEs purchase mortgages from lenders, and either hold the mortgages as investments or pool the mortgages into mortgage-backed securities, which are sold to institutional investors. The GSEs guarantee that investors in these MBS will receive timely payment of principal and interest even if the borrower becomes delinquent.
In September 2008, the GSEs individually agreed with their regulator, the Federal Housing Finance Agency (FHFA), that unexpected mortgage delinquencies and resulting losses jeopardized their solvency. The GSEs agreed to direct government control, known as voluntary conservatorship, which is the equivalent of bankruptcy reorganization for a financial company. As part of the agreement to conservatorship, Treasury contracted to provide financial support to keep the GSEs solvent. Pursuant to this agreement, which has been amended three times, the federal government has purchased more than $187 billion in special stock from Fannie Mae and Freddie Mac. In addition, the government holds $821 billion in MBS issued by Fannie Mae and Freddie Mac. The agreement requires Treasury to provide up to $274 billion of additional funds, if necessary. In return for this support, Treasury receives special stock and other considerations.
The 113th Congress and the Administration are deliberating how and when to unwind the federal control of Fannie Mae and Freddie Mac, and what (if any) is the proper role of the federal government in the nation's mortgage markets. Some proposals have called for reducing the government's support of Fannie Mae and Freddie Mac, selling off their assets, and revoking their congressional charters. Other proposals have concentrated not so much on unwinding Fannie Mae and Freddie Mac, as on replacing them with new institutions.
It is not only Fannie Mae and Freddie Mac that have raised issues. At the end of FY2012, the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development, reported the fund backing its insured mortgages had a negative net worth of -1.44%.
This report examines options concerning the future of the GSEs and the future government role in residential mortgage markets. Other CRS reports address related issues such as conservatorship, the GSEs' financial condition, residential mortgage markets in other nations, and affordable housing.
This report will be updated as warranted.