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Summary:
Recent turmoil in the housing and financial markets has raised doubts about the future of Fannie Mae and Freddie Mac, which are chartered by Congress as governmentsponsored enterprises (GSEs) and are widely believed to have an implicit guarantee from the federal government. Now the implicit guarantee is nearly explicit: Section 1117 of the Housing and Economic Recovery Act of 2008 (H.R. 3221, P.L. 110-289) authorizes the Treasury to purchase any amount of Fannie or Freddie securities, whether debt or equity, if necessary to provide stability to financial markets, prevent disruptions in the availability of mortgage credit, or protect the taxpayer. This means that if either of the two GSEs is unable to raise funds in private markets, the federal government could simply purchase debt securities that the firms were unable to sell elsewhere, or recapitalize either firm by purchasing stock, possibly becoming the majority shareholder in the process. The Federal Reserve has taken actions to allow Fannie and Freddie to borrow directly from the discount window, a privilege normally available only to Federal Reserve System banks. The Securities and Exchange Commission has issued an emergency order restricting short selling of Fannie and Freddie's stock. The Office of Federal Housing Enterprise Oversight (OFHEO) -- the GSEs safety and soundness regulator -- has repeated assurances that Fannie and Freddie have adequate capital, but as highly leveraged financial intermediaries, Fannie Mae and Freddie Mac have limited capital to cushion them against losses. This report will be updated as warranted.
