	Background

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that have played a central role in mortgage finance. Because private capital has not yet returned to the market, over 90% of new mortgages are purchased, guaranteed, and securitized by Fannie, Freddie, or full-faith-and-credit government agencies, such as the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae). Continued support for Fannie and Freddie has been costly. As of the fourth quarter of 2010, these purchases have totaled $90.2 billion for Fannie Mae and $63.7 billion for Freddie Mac. In February 2011, the Obama Administration released a report that set out several options for the future of housing finance. Fannie and Freddie in the Obama Administration's Report

"Reforming America's Housing Finance Market: A Report to Congress," the Obama Administration's reform proposal, identifies four principal reasons why Fannie and Freddie failed. 1. To maximize profits, both firms took on excessive risks. Rather than address the identified problems through specific legislative or regulatory proposals, the Administration proposes to wind down Fannie and Freddie's participation in the housing market. This would be done by removing their competitive advantages and further restricting the kinds of mortgages that they are allowed to purchase. This would allow private firms to compete on more even terms, and should reduce Fannie and Freddie's market share over time. 3. The Administration's report does not set out specific timetables, but notes that reducing Fannie and Freddie's role depends on the return of private capital to the housing market. In congressional testimony, Treasury Secretary Timothy Geithner has estimated that the process may take five to seven years. Broad Options for the Housing Market

The Administration's report sets out three long-range scenarios for the future government role in the housing market. Option 3 exposes government to more risk than the first two, and has more potential to distort private economic decisions than option 1 or option 2. The regulated mortgage insurers to whom the government would provide mortgage reinsurance may be subject to some of the same conflicts and incentive problems that afflicted Fannie and Freddie. That is, the basic policy choice is between the extent to which taxpayers are protected from loss and the amount of support and liquidity government provides to the mortgage market. (For a broader survey of options for restructuring Fannie and Freddie, see CRS Report R40800, GSEs and the Government's Role in Housing Finance: Issues for the 112 th Congress , by [author name scrubbed].) Privatizing Fannie Mae and Freddie Mac

There have been calls to stem taxpayer losses by bringing Treasury support for Fannie and Freddie to a speedier end—a frequent criticism of the Dodd-Frank Act was that it failed to address the GSE problem. 1182 (Representative Hensarling)—proposes to set a term certain for ending the conservatorship and government assistance. Under H.R. The value of assets in the investment portfolio would have to shrink to no more than $250 billion within three years of the end of conservatorship. 1182 proposes, but would take effect over a longer time frame. For example, the Mortgage Bankers Association (MBA) and the Center for American Progress (CAP) have published position papers that would preserve more of the functions currently performed by Fannie and Freddie in government-chartered or regulated entities. However, given the size of the losses, the Administration does not appear willing to expose the taxpayer to the pre-crisis level of mortgage risk, even though that risk—if managed properly over the long-term—could make mortgage credit more available and affordable to American households.
In February 2011, the Obama Administration released a report, "Reforming America's Housing Finance Market," setting out several options for the future of housing finance. In the past, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have played a crucial role in government support for the mortgage market. In 2008, however, both firms were taken over by the government and have received government life support since then. Fannie and Freddie continue to provide funds for mortgage lending, at a time when private capital has largely exited the market and not yet returned, but the expense to the government has been high: through the end of 2010, the Treasury has contributed $90.2 billion to Fannie and $63.7 billion to Freddie.
The Administration's report argues that Fannie and Freddie's failures expose basic flaws in the GSE model. Poor regulation, excessive risk-taking, and an implicit government guarantee of Fannie and Freddie debt contributed to a situation in which GSE profits went to private management and shareholders, but losses fell to the taxpayers. The Administration proposes to shrink Fannie and Freddie's role in housing markets as private capital returns. No specific timetable is set out in the report, but Treasury Secretary Timothy Geithner has estimated that the process of winding down Fannie and Freddie may take five to seven years.
The Administration proposes to raise the fees Fannie and Freddie charge for guaranteeing mortgage debt, limit the types of mortgages they can buy, and reduce the size of their investment portfolios. These steps can occur without congressional action—the effect would be to remove the GSEs' competitive advantages and allow private firms to compete on a more equal footing.
For the long-term, the report sets out three options: (1) a private system of housing finance, with government intervention only to support homeownership among specific groups, such as veterans or low-income families; (2) a private system with a federal backstop that would only operate in a crisis; and (3) a system of regulated private mortgage insurers backed by a federal reinsurance system, with premiums set high enough that taxpayers would bear losses only after significant amounts of private capital had been wiped out. In general, option 1 implies less risk for taxpayers, but more expensive or less available mortgage credit. Option 3 would provide the most support to the broad mortgage market, but would expose taxpayers to more risk and also have more potential to distort market incentives and private investment decisions.
Other proposals would lie on either end of the continuum represented by the Administration's three options. H.R. 1182 (Representative Hensarling) seeks to stem taxpayer losses by setting a two-year limit for the conservatorships of Fannie Mae and Freddie Mac and providing conditions for the continued operation of the firms or for the dissolution of the GSEs if they are judged to be not financially viable.
Proposals from the Mortgage Bankers Association and the Center for American Progress envision a more active federal role in the housing market, with new government-chartered entities taking on some of Fannie and Freddie's functions, but with additional regulation and safeguards. In short, in reforming the GSEs, Congress faces a trade-off between placing the taxpayer at risk to downturns in the mortgage market and reducing that risk, which could make mortgage credit less available and affordable to American households.
For a broader discussion of GSE reform, see CRS Report R40800, GSEs and the Government's Role in Housing Finance: Issues for the 112th Congress, by [author name scrubbed].