What Was the Fannie Mae and Freddie Mac Bailout?
In 2008, the United States housing market crashed and the government was forced to intervene and provide a bail out package for two government-sponsored entities (GSE): Fannie Mae and Freddie Mac. The bailout for Fannie Mae and Freddie Mac was part of the larger Troubled Asset Relief Program, a sweeping financial plan enacted by Congress in late 2008 to help stabilize the economy and support the banking sector.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac were two government-sponsored mortgage entities that were chartered by Congress in 1938 and 1970, respectively. Both entities were created to increase the availability of mortgage credit to consumers, while playing an important role in the US housing and financial markets. When government-sponsored entities obtain resources, they are not limited to private lenders and investors. GSEs can borrow funds at lower costs and buy mortgages at higher amounts, underwriting standards, and interest rate levels.
The Mission of Fannie Mae and Freddie Mac
The mission of Fannie Mae and Freddie Mac is to expand affordable housing, simplify processes, support economic stability, and reduce mortgage rates. Fannie Mae and Freddie Mac are designed to purchase mortgages from lenders and repackage them into mortgage-backed securities. These securities, backed by the full faith and credit of the US government, allowed for a greater availability of mortgages to Americans.
How Fannie Mae and Freddie Mac Worked Before the Bailout
Before the financial crisis of 2008, Fannie Mae and Freddie Mac were both profit-seeking enterprises that also functioned as mission-oriented institutions. In the pre-bailout environment, GSEs would buy mortgages from lenders and repackage them into mortgage-backed securities. In addition, GSEs had the authority to direct lenders to make certain underwriting decisions, such as setting limits on loan-to-value (LTV) ratios.
Leading Up to the Bailout
The bailout of Fannie Mae and Freddie Mac was a result of a series of events that occurred leading up to the bail-out. During the early 2000s, there was an increase in mortgage lending as GSEs approved more mortgages with higher borrowing rates and more lenient underwriting standards. Subprime and other risky mortgages, such as Adjustable-Rate Mortgages (ARM) and Interest-Only Mortgages caused a housing bubble to form. By 2007, this bubble burst and the economy went into a deep recession, with housing prices declining and foreclosures on the rise. The subprime mortgage market began to unravel, resulting in losses for both Fannie Mae and Freddie Mac.
The Bailout of Fannie Mae and Freddie Mac
In March 2008, the US government took over Fannie Mae and Freddie Mac as part of a larger financial rescue package. Under the terms of the bailout package, the US government provided up to $200 billion in capital to each GSE and obtained senior preferred stock in the companies. The government also received warrants, allowing it to purchase additional common stock of either or both companies. The bailout package also included $2.25 billion in credit or credit backstops, which were essentially loan guarantees.
The Impact of the Bailout
The bailout of Fannie Mae and Freddie Mac has had a significant impact on the US economy. The bailout led to increased stability in the mortgage market, as lenders became less willing to default on mortgages and could get access to the capital needed to remain in business.
The Benefits of the Bailout
The bailout package for Fannie Mae and Freddie Mac provided a number of widespread benefits. By providing the required assistance, the GSEs were able to stay afloat and expand their roles during the recession. This was important since Fannie Mae and Freddie Mac played a major role in the mortgage market before, during, and after the crisis.
Overall, the bailout package allowed the GSEs to stabilize the housing market in the US, as borrowers were able to acquire mortgage financing at more attractive rates. In addition, taxpayers received a windfall since Fannie Mae and Freddie Mac had to pay back the bailout money plus additional dividends. As a result, taxpayers have received $282 billion in returns, more than two and a half times the original investment by the US government.
The Fannie Mae and Freddie Mac bailout was part of the larger emergency financial plan, enacted in the wake of the financial crisis of 2008. The government-sponsored entities were able to remain in business, and their role in the mortgage market was maintained, providing Americans with more access to mortgage financing. The government provided a package of capital and loan guarantees to the GSEs and has since received a return on this investment, with taxpayers receiving $282 billion in returns. Ultimately, the Fannie Mae and Freddie Mac bailout has been beneficial for all parties involved.
