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Atlanta Fed Working Papers


An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and an Evaluation of the Policy Options for Reducing Those Risks

Robert A. Eisenbeis, W. Scott Frame, and Larry D. Wall
Working Paper 2006-2
April 2006

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Fannie Mae and Freddie Mac are government-sponsored enterprises that are central players in U.S. secondary mortgage markets. Over the past decade, these institutions have amassed enormous mortgage- and non-mortgage-oriented investment portfolios that pose significant interest-rate risks to the companies and a systemic risk to the financial system. This paper describes the nature of these risks and systemic concerns and then evaluates several policy options for reducing the institutions’ investment portfolios. We conclude that limits on portfolio size (assets or liabilities) would be the most desirable approach to mitigating the systemic risk posed by Fannie Mae and Freddie Mac.

JEL classification: G21, G28

Key words: government-sponsored enterprises, systemic risk, portfolio limits


The authors thank Andreas Lehnert, Wayne Passmore, Bob Pribble, and Shane Sherlund for helpful comments on an earlier draft. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Robert A. Eisenbeis, Executive Vice President and Director of Research, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8824, robert.a.eisenbeis@atl.frb.org; W. Scott Frame, Financial Economist and Associate Policy Adviser, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8783, scott.frame@atl.frb.org; or Larry D. Wall, Financial Economist and Policy Adviser, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8937, larry.wall@atl.frb.org.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404/498-8020.

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