Fannie Mae’s and Freddie Mac’s Financial Problems: Frequently Asked Questions Page: 1 of 6
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Order Code RS22916
Updated August 4, 2008
~. CRS Report for Congress
Fannie Mae's and Freddie Mac's Financial
Problems: Frequently Asked Questions
N. Eric Weiss
Specialist in Financial Economics
Government & Finance Division
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 government-
sponsored 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.
Why Are Fannie Mae's and Freddie Mac's Stock Prices Declining So
Much? Recent changes in the perception of the risks that Fannie Mae and Freddie Mac
face - in terms of future profitability and even continued financial viability - may have
combined to reduce the price that investors are willing to pay for a share of the
enterprises. Between the end of 2007 and August 1, 2008, Fannie's stock lost 72% of its
value, while Freddie's fell by 77%.
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Fannie Mae’s and Freddie Mac’s Financial Problems: Frequently Asked Questions, report, August 4, 2008; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc806282/m1/1/: accessed April 25, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.