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1.2.3.2 Fall of the Government Sponsored Entities

Through the last decades of the twentieth century and the first few years of the twenty-first, Freddie Mac and Fannie Mae purchased and securitized billions of dollars’ worth of conventional, conforming mortgages,99 as well as guarantying billions worth of mortgage-backed securities.100 The two GSEs benefited greatly from the often denied, but widely held, belief that all mortgage-backed securities they issued or guaranteed were, in turn, guaranteed by the full faith and credit of the United States government.101 This implicit guarantee helped the GSEs obtain credit at lower rates than available to any traditional institutions in the mortgage industry.

In 1992 Congress, growing concerned with the state of the GSEs, passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.102 The Act established minimum capital requirements for the GSEs and created the Office of Federal Housing Enterprise Oversight (OFHEO). OFHEO, an independent agency within HUD, was tasked with supervising the GSEs and monitoring their safety and soundness. In addition, the Act gave the GSEs a new duty to serve markets that traditionally had limited access to credit (such as low and moderate-income housing and the manufactured-home market).103

The OFHEO, however, was widely viewed as ineffective. And, in the early 2000s, Fannie Mae and Freddie Mac slowly began to unravel. To maintain their relevance in an increasingly hot mortgage market, they lowered their standards and purchased riskier loans with less than prime underwriting quality.104 Accounting misconduct was also discovered at both entities.105 In 2007, as the mortgage delinquency rate began to climb, Fannie Mae and Freddie Mac sustained tremendous losses. That year the implicit guarantee became reality as the Treasury Department publicly defended the GSEs and began to provide financial support.106

The following year the Housing and Economic Recovery Act of 2008 abolished the OFHEO and created a new regulator, the Federal Housing Finance Agency (FHFA).107 In September 2008, that agency put Fannie Mae and Freddie Mac into conservatorship,108 essentially nationalizing the two most powerful institutions in the American housing industry.109

Since then, Congress has intermittently debated the future of federal involvement in residential mortgage financing but has yet to reach a consensus.110

Footnotes

  • 99 {99} See § 2.4, infra (definitions of “conventional” and “conforming”).

  • 100 {100} See generally James R. Hagerty, The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall (2012).

  • 101 {101} Congress explicitly denied the existence of this guarantee in 1992. 12 U.S.C. § 4501 (“The Congress finds that— . . . (4) neither the enterprises nor the Banks, nor any securities or obligations issued by the enterprises or the Banks, are backed by the full faith and credit of the United States; . . . .”).

  • 102 {102} Pub. L. No. 102-550, tit. XIII, 106 Stat. 3672, 3941–4012 (1992) (codified in scattered sections of 12 U.S.C.) (Title XIII of the Housing and Community Development Act of 1992).

  • 103 {103} Pub. L. No. 102-550, §§ 1331–1334, 106 Stat. 3672, 3956–3961 (1992) (codified at 12 U.S.C. §§ 4561–4564).

  • 104 {104} See Theresa R. DiVenti, Dep’t of Hous. & Urban Dev., Fannie Mae and Freddie Mac: Past, Present, and Future, 11 Cityscape: A Journal of Policy Development and Research 231, 236 (2009), available at www.huduser.org.

  • 105 {105} Fed. Hous. Fin. Agency, Office of the Inspector Gen., A Brief History of the Housing Government-Sponsored Enterprises 7 (undated) (available online as companion material to this treatise).

  • 106 {106} See Dale A. Oesterle, The Collapse of Fannie Mae and Freddie Mac: Victims or Villains?, 5 Entrepreneurial Bus. L.J. 733, 743 (2010).

  • 107 {107} Id. at 743.

  • 108 {108} Id.

  • 109 {109} See Jesse Eisinger, We’ve Nationalized the Home Mortgage Market; Now What?, ProPublica (Dec. 18, 2012) (describing “creeping nationalization” of housing market since 2008), available at www.propublica.org; Stephen Labaton & Edmund L. Andrews, In Rescue to Stabilize Lending, U.S. Takes over Mortgage Finance Titans, N.Y. Times, Sept. 7, 2008, available at www.nytimes.com (describing takeover of Fannie Mae and Freddie Mac).

    For more details on the modern history of the GSEs, see Appendix 1 of Barry Zigas, Consumer Fed’n of Am., Re-Engineering the Mortgage Finance System: Charting a Future Course for the Secondary Market (Dec. 2, 2009) (describing systematic benefits of the GSEs), available at www.consumerfed.org.

  • 110 {110} For a discussion of some of the issues involved, see the Government Accountability Office’s report to Congress entitled Housing Finance System: A Framework for Assessing Potential Changes (Pub. No. GAO-15-131) (Oct. 2014).