{ "id": "R45828", "type": "CRS Report", "typeId": "REPORTS", "number": "R45828", "active": true, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 602808, "date": "2019-07-25", "retrieved": "2019-07-29T22:23:32.426546", "title": "Overview of Recent Administrative Reforms of Fannie Mae and Freddie Mac", "summary": "Congress chartered Fannie Mae and Freddie Mac, also known collectively as the government-sponsored enterprises (GSEs), to promote homeownership for underserved groups and locations by providing liquidity to the secondary mortgage market. The GSEs specifically facilitate financing for single-family residential mortgages and multifamily (apartment and condominium) construction. After purchasing pools of single-family 30-year fixed rate mortgages, the GSEs retain the credit (default) risks from the whole mortgages and subsequently issue mortgage-backed securities (MBSs), which are bond-like securities. Investors who purchase MBSs are guaranteed a return on their initial principal and interest, but they assume prepayment risk, which is the risk that borrowers prepay their mortgages ahead of schedule. In contrast to the original mortgages (with both credit and prepayment risks attached), the MBSs are relatively more liquid, meaning they can be exchanged for cash more quickly with little change in their quoted prices. If institutional investors from around the globe are willing to hold liquid MBSs, then additional funds are channeled to the nation\u2019s mortgage market (particularly to support 30-year fixed rate mortgages). National mortgage rates tend to fall as the supply of funds in this market increases, making homeownership more affordable.\nThe Federal Housing Finance Agency (FHFA), an independent federal government agency created by the Housing Economic and Recovery Act of 2008 (HERA; P.L. 110-289), is the GSE\u2019s primary supervisor. FHFA regulates the GSEs for prudential safety and soundness and to ensure that they meet their affordable housing mission goals. In September 2008, the GSEs experienced losses that exceeded their statutory minimum capital requirement levels as a result of above-normal mortgage defaults. The GSEs also experienced losses following spikes in short-term borrowing rates that occurred while they were funding long-term assets held in their portfolios. The GSEs subsequently were placed under conservatorship, and the FHFA currently has the powers of management, boards, and shareholders until the GSEs\u2019 financial safety and soundness can be restored. In addition, the U.S. Treasury is providing financial support through the Senior Preferred Stock Purchase Agreements (PSPAs) program, which requires the GSEs to pay dividends to Treasury rather than private shareholders while they are under conservatorship. \nCongressional interest in the GSEs has continued since conservatorship. First, the final costs to the U.S. Treasury (and, by proxy, to U.S. taxpayers) of providing financial support to the GSEs are unknown. Furthermore, the GSEs\u2019 future viability could affect the availability of single-family 30-year fixed rate mortgage loan products. Although these mortgage products are arguably popular with borrowers, private lenders may be reluctant to retain in portfolio and fund relatively less liquid mortgages\u2014with both credit and prepayment risks attached\u2014for several decades. Congressional interest has been reflected by various draft proposals, bills, and oversight hearings on housing finance reform. During the 116th Congress, the Senate Committee on Banking, Housing, and Urban Affairs released a proposal that would likely affect the GSEs\u2019 role in the housing finance system. President Donald J. Trump also released a memorandum directing federal agencies to develop a plan to reform the housing finance system, which includes ending the conservatorships.\nThe FHFA\u2019s initiatives have focused primarily on managing the GSEs\u2019 liquidity, operational, and credit risks. The FHFA has directed the GSEs to standardize numerous processes to foster greater liquidity in the market for their MBSs. The standardization initiatives may also reduce operational risks, particularly risks associated with data breaches and other technology disruptions. The GSEs are also being required to share more of the credit risk linked to their single-family mortgage purchases with the private sector.\nThe GSEs still face future challenges. For example, recent FHFA initiatives require the GSEs to harmonize their business models, including certain borrower risk characteristics that are eligible for securitization. The GSEs\u2019 ability to satisfy their affordable housing goals, therefore, might depend upon the extent to which borrowers with risk characteristics deemed eligible for securitization overlap with those who traditionally face greater difficulty accessing credit. In addition, the GSEs\u2019 securitization activities may depend upon certain legal protections that loan originators receive when their mortgages are sold to the GSEs. These protections are granted under what is referred to as the GSE patch, which expires on January 10, 2021. It is unclear how the secondary-market participants\u2014the loan originators, the GSEs, and investors in the MBSs issued by the GSEs\u2014will respond if the GSE patch expires.", "type": "CRS Report", "typeId": "REPORTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/R45828", "sha1": "2af4b573165a10af0b16efa262b5f65f49820fa7", "filename": "files/20190725_R45828_2af4b573165a10af0b16efa262b5f65f49820fa7.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/R45828", "sha1": "162f4badff77e7256d3249eb14305c6dd184be1b", "filename": "files/20190725_R45828_162f4badff77e7256d3249eb14305c6dd184be1b.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4776, "name": "Housing Finance" } ] } ], "topics": [ "Domestic Social Policy", "Economic Policy" ] }