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The rescue of Fannie Mae and Freddie Mac

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  • W. Scott Frame
  • Andreas Fuster
  • Joseph Tracy
  • James Vickery

Abstract

We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms? value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.

Suggested Citation

  • W. Scott Frame & Andreas Fuster & Joseph Tracy & James Vickery, 2015. "The rescue of Fannie Mae and Freddie Mac," FRB Atlanta Working Paper 2015-2, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2015-02
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    2. David Finkelstein & Andreas Strzodka & James Vickery, 2018. "Credit risk transfer and de facto GSE reform," Economic Policy Review, Federal Reserve Bank of New York, issue 24-3, pages 88-116.
    3. Rice, Tara & Rose, Jonathan, 2016. "When good investments go bad: The contraction in community bank lending after the 2008 GSE takeover," Journal of Financial Intermediation, Elsevier, vol. 27(C), pages 68-88.
    4. Sedunov, John, 2020. "Small banks and consumer satisfaction," Journal of Corporate Finance, Elsevier, vol. 60(C).
    5. W. Scott Frame, 2016. "The federal home loan bank system and U.S. housing finance," FRB Atlanta Working Paper 2016-2, Federal Reserve Bank of Atlanta.
    6. Jesper Berg & Morten Bækmand Nielsen & James Vickery, 2018. "Peas in a pod? Comparing the U.S. and Danish mortgage finance systems," Economic Policy Review, Federal Reserve Bank of New York, issue 24-3, pages 63-87.
    7. Michael Jacobs, 2016. "Stress Testing and a Comparison of Alternative Methodologies for Scenario Generation," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(6), pages 1-7.
    8. W. Scott Frame & Joseph Tracy, 2018. "Introduction to Special Issue: The Appropriate Role of Government in U.S. Mortgage Markets," Economic Policy Review, Federal Reserve Bank of New York, issue 24-3, pages 1-10.
    9. W. Scott Frame, 2015. "Introduction to Special Issue: Government Involvement in Residential Mortgage Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 807-819, November.
    10. W. Scott Frame & Kristopher S. Gerardi & Paul S. Willen, 2015. "The failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO," FRB Atlanta Working Paper 2015-3, Federal Reserve Bank of Atlanta.
    11. Amine Ouazad & Matthew E. Kahn, 2019. "Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters," NBER Working Papers 26322, National Bureau of Economic Research, Inc.
    12. Park, Hyun Woong & Bernardin, Thomas, 2018. "Liquidity, bank runs, and fire sales under local thinking," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 89-102.
    13. Jason Thomas & Robert Order, 2020. "Fannie Mae and Freddie Mac: Risk-Taking and the Option to Change Strategy," The Journal of Real Estate Finance and Economics, Springer, vol. 60(3), pages 270-307, April.

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    More about this item

    Keywords

    Fannie Mae; Freddie Mac; housing finance; financial crisis; government intervention;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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