Atlanta Fed Economist Examines Intervention Into Housing GSEs
When the U.S. government created Fannie Mae and Freddie Mac, it did so with a single public mission: to provide liquidity and stability to the residential mortgage market. The government sponsored enterprises (GSEs) were also created as publicly traded firms although they enjoyed the benefit of implied public sector support for their obligations.
Recently, however, as mortgage market stress mounted, Fannie Mae and Freddie Mac's exposure to U.S. residential mortgages placed these GSEs in financial distress. As a result of adverse developments in the mortgage market, the federal government was compelled to intervene to stabilize Fannie and Freddie as well as mortgage markets generally. On Sept. 7, 2008, the government placed Fannie Mae and Freddie Mac into conservatorship.
Examining the causes of distress
The declines led to a wave of mortgage defaults and foreclosures that revealed the extent of Fannie and Freddie's vulnerability: The companies operated with a thin capital base that left them dangerously exposed to mortgage market volatility. Investors became wary of the companies, their values plummeted, and once it became apparent that they would be unable to service their debt, the federal government began looking at ways to intervene to stabilize the firms.
Assessing the effectiveness of conservatorship
Nor is the financial distress limited to Fannie Mae and Freddie Mac, Frame points out in his paper, citing concurrent difficulties at numerous mortgage originators, private mortgage insurance companies, and monoline bond insurers. "Hence, the federal government may need to redefine its role in supporting primary and secondary mortgage markets," he said, calling for an examination into the public sector's role in mortgage markets, the efficacy of the GSE model of financial intermediation, and the future of Fannie Mae and Freddie Mac.
June 17, 2009