Financial Update (Second Quarter 2006)


 Guynn Notes Growth,
 Some Uncertainties

 Conference Explores
 Markets, Institutions

 Economists Propose
 Fannie, Freddie
 Portfolio Limits

 Kohn Nominated
 as Fed’s
 Vice Chairman

 Atlanta Fed 2005
 Annual Report
 Remembers Katrina

 Fed Announces
 Changes to Cash
 Inventory Services

 Agencies Issue
 Advisory About Flu

 Exploring Credit,
 Debit Cards’
 Payment Process

 Atlanta Fed to
 Maintain Presence
 in Birmingham

 Barron: Community
 Banks Face

 Fed Gov. Olson
 Addresses Importance
 of Banks

 Board Launches
 Web Site
 Geared to Kids

 New Fed Product
 Helps Mitigate
 ACH Risk

 FDIC Ups Insurance
 Limits on Some


  Data Bank

  Circular Letters



Fed Economists Point to Financial System Risks from Housing GSEs

house for sale

The two largest portfolios of residential mortgage debt in the United States are held by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs). Together, their portfolios account for about 20 percent of a $7.7 trillion market. Operating with unique congressional charters, which have created a perception in financial markets that their obligations are guaranteed by the federal government, these two entities maintain investment portfolios that have become increasingly controversial because of their size, their management, and the systemic risks they pose to the financial system, according to three Atlanta Fed research economists.

Clarity sought on GSE risk
In a recent Atlanta Fed working paper (Working Paper 2006-2), authors Robert Eisenbeis, research director of the Atlanta Fed, and economists Scott Frame and Larry Wall discuss these large investment portfolios’ risk. They note that the Fannie Mae and Freddie Mac mortgage portfolios have become the central policy issue in the congressional debate in terms of the GSEs’ overall safety and soundness and an appropriate approach to supervising and regulating them.

Working Paper 2006-2
Bob Eisenbeis’s Web page
W. Scott Frame’s Web page
Larry Wall’s Web page

Tracing the evolution of the GSEs
The authors provide a historic framework regarding Fannie Mae (formerly known as the Federal National Mortgage Association), created in 1938, and Freddie Mac (also known as the Federal Home Loan Mortgage Corp.), an entity created by Congress in 1970. They also describe the dramatic growth of the GSEs, noting that Fannie Mae (with more than $1 trillion in assets in 2003) and Freddie Mac ($803 billion in assets in 2003) are the second- and third-largest U.S. companies in terms of asset size.

The authors also evaluate a number of policy options for reducing Fannie Mae and Freddie Mac’s enormous mortgage-related investment portfolios. The authors conclude that limits on the portfolio size—either assets or liabilities—would be the most effective approach to mitigating the portfolios’ inherent systemic risk.