GAO 

United States Government Accountability Office

Report to Congressional Committees

FANNIE MAE AND 

FREDDIE MAC 

Analysis of Options 

for Revising the 

Housing Enterprises’ 

Long-term Structures 

September 2009 

GAO-09-782 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2009

FANNIE MAE AND FREDDIE MAC 

Analysis of Options for Revising the Housing

Enterprises’ Long-term Structures

Highlights of GAO-09-782, a report to 

congressional committees 

Congress established Fannie Mae 

and Freddie Mac (the enterprises) 

with two key housing missions: 

(1) provide stability in the 

secondary market for residential 

mortgages (also in periods of 

economic stress) and (2) serve the 

mortgage credit needs of targeted 

groups such as low-income 

borrowers. To accomplish these 

goals, the enterprises issued debt 

and stock, purchased mortgages 

from lenders with the proceeds, 

and retained them in portfolio or 

pooled them into mortgage-backed 

securities (MBS) sold to investors. 

On September 6, 2008, the Federal 

Housing Finance Agency (FHFA) 

placed the enterprises into 

conservatorship out of concern 

that their deteriorating financial 

condition ($5.4 trillion in 

outstanding obligations) would 

destabilize the financial system. 

With estimates that the 

conservatorship will cost taxpayers 

nearly $400 billion, GAO initiated 

this report under the Comptroller 

General’s authority to help inform 

the forthcoming congressional 

debate on the enterprises’ future 

structures. It discusses the 

enterprises’ performance in 

meeting mission requirements, 

identifies and analyzes options to 

revise their structures, and 

discusses key transition issues. 

GAO reviewed studies and data, 

and interviewed housing finance 

experts and officials from the 

enterprises, FHFA, Departments of 

the Treasury (Treasury) and 

Housing and Urban Development 

(HUD), the Federal Reserve, 

lenders, and community groups. 

The enterprises have a mixed record in meeting their housing mission 

objectives, and both capital and risk management deficiencies have 

compromised their safety and soundness as follows: 

• The enterprises’ secondary market activities are credited with helping 

create a liquid national mortgage market, lowering mortgage rates 

somewhat, and standardizing mortgage underwriting processes. However, 

their capacity to support housing finance during periods of economic 

stress has not been established, and they only have been able to do so 

during the current recession with substantial financial assistance from 

Treasury and the Federal Reserve. 

• There is limited evidence that a program established in 1992 that required 

the enterprises to meet annual goals for purchasing mortgages serving 

targeted groups materially benefited such groups. 

• The enterprises’ structures (for-profit corporations with government 

sponsorship) undermined market discipline and provided them with 

incentives to engage in potentially profitable business practices that were 

risky and not necessarily supportive of their public missions. For 

example, the enterprises’ retained mortgage portfolios are complex to 

manage and expose them to losses resulting from changes in interest 

rates. Further, the enterprises’ substantial investments in assets 

collateralized by subprime and other questionable mortgages in recent 

years generated losses that likely precipitated the conservatorship. 

It will be necessary for Congress to reevaluate the roles, structures, and 

performance of the enterprises, and to consider options to facilitate mortgage 

finance while mitigating safety and soundness and systemic risk concerns. 

These options generally fall along a continuum with some overlap in key 

areas: 

• Reconstitute the enterprises as for-profit corporations with government 

sponsorship but place additional restrictions on them. While restoring 

the enterprises to their previous status, this option would add controls to 

minimize risk. As examples, it would eliminate or reduce mortgage 

portfolios, establish executive compensation limits, or convert the 

enterprises from shareholder-owned corporations to associations owned 

by lenders. 

• Establish the enterprises as government corporations or agencies. 

Under this option, the enterprises would focus on purchasing qualifying 

mortgages and issuing MBS but eliminate their mortgage portfolios. The 

Federal Housing Administration (FHA), which insures mortgages for lowincome and first-time borrowers, could assume additional responsibilities 

for promoting homeownership for targeted groups. 

• Privatize or terminate them. This option would abolish the enterprises in 

their current form and disperse mortgage lending and risk management 

throughout the private sector. Some proposals involve the establishment 

of a federal mortgage insurer to help protect mortgage lenders against 

catastrophic mortgage losses. 

View GAO-09-782 or key components. 

For more information, contact William B. 

Shear at (202) 512-8678 or shearw@gao.gov. 
United States Government Accountability Office

Highlights of GAO-09-782 (continued) 

GAO provides a framework for identifying trade-offs associated with the options and identifies potential regulatory and 

oversight structures, principles, and actions that could help ensure their effective implementation (see table). 

Summary of Implications of the Options to Revise the Enterprises’ Structures 

Reestablish as governmentsponsored enterprises (GSE) Establish government corporation 

or agency 

Privatize or terminate 

Ability to provide liquidity and 

support to mortgage markets 

Reconstituting the enterprises as 

GSEs may provide liquidity and other 

benefits to mortgage finance during 

normal economic times. However, as 

for-profit entities, their capacity to 

support housing finance during 

stressful economic periods is open to 

question. 

A government entity, with access to 

Treasury-issued debt, may be 

positioned to provide mortgage liquidity 

during normal and stressful economic 

periods. But, without a portfolio to hold 

mortgages, its capacity to do the latter 

also may be limited. Treasury or the 

Federal Reserve may need to step in 

and purchase mortgage assets under 

such circumstances. 

If other financial institutions assumed 

key enterprise activities such as 

mortgage purchases and MBS 

issuance, liquid mortgage markets 

could be reestablished in normal 

economic times. But, private mortgage 

lending has collapsed in the current 

recession. A federal mortgage insurer 

could help ensure that private lenders 

provide mortgage funding in stressful 

economic periods. 

Support housing opportunities 

for targeted groups 

For-profit status and elimination of 

mortgage portfolios could limit 

enterprises’ capacity to fulfill this 

objective. But, permitting smaller 

mortgage portfolios, expanding FHA 

programs, or providing direct financial 

assistance to targeted borrowers could 

be alternatives. 

Might be expected to perform this 

function as a public entity. But, may 

face challenges implementing a 

program to purchase mortgages for 

such groups if they cannot hold these 

mortgages in portfolio. FHA insurance 

programs could be expanded as an 

alternative. 

Would eliminate traditional basis 

(government sponsorship) for previous 

programs that required enterprises to 

serve mortgage credit needs of 

targeted groups. But, a federal 

mortgage insurer could be required to 

establish such programs due to its 

government sponsorship. 

Potential safety and 

soundness concerns 

Although additional regulations could 

minimize risks, safety and soundness 

concerns may remain as this option 

would preserve the enterprises’ 

previous status as for-profit 

corporations with government 

sponsorship. 

May mitigate risk due to lack of profit 

motive and the elimination of existing 

mortgage portfolios. However, 

managing the enterprises’ ongoing 

MBS business still would be complex 

and risky, and a government entity 

may lack the staffing and technology to 

do so effectively. 

In one scenario, risks would decrease 

as mortgage lending would be 

dispersed among many institutions. 

But, large institutions that assumed 

functions such as MBS issuance may 

be viewed as too big to fail, which 

could increase risks. A federal 

mortgage insurer also may not charge 

premiums that reflect its risks. 

Key elements for potential 

regulatory and oversight 

structure 

Reduce or perhaps eliminate the 

enterprises’ mortgage portfolios, 

increase capital standards and impose 

regulations, such as executive 

compensation limits, and establish new 

ownership structures, as appropriate. 

Require financial disclosures to help 

ensure transparency and provide 

congressional oversight of the 

enterprises’ and FHFA’s performance. 

Provide entity with flexibility to hire 

staff and obtain necessary technology. 

Establish risk-sharing arrangements 

with the private sector, appropriate 

disclosures of risks and liabilities in the 

federal budget to help ensure 

transparency, and robust 

congressional oversight of operations. 

Fragmented U.S. financial regulatory 

structure would need to be revised, as 

GAO has identified in previous reports, 

to help oversee risks of large 

institutions that may assume enterprise 

functions or acquire their assets. 

Oversight structure for a federal 

mortgage insurer also would need to 

be established. 

 Source: GAO analysis of structural reform options. 

During the conservatorship, the federal government has tasked the enterprises to implement a variety of programs 

designed to help respond to the current housing crisis, such as helping borrowers forestall foreclosures. While these 

efforts may be necessary to help mitigate the effects of the housing crisis, they also might significantly affect the costs 

of the conservatorship and transition to a new structure. For example, investors might be unwilling to invest capital in 

reconstituted enterprises unless Treasury assumed responsibility for losses incurred during their conservatorship. 

Finally, any transition to a new structure would need to consider the enterprises’ still-dominant position in housing 

finance and be implemented carefully (perhaps in phases) to ensure its success. 

In written comments, FHFA stated that the report is timely and does a good job summarizing the dominant proposals 

for restructuring the enterprises and some of their strengths and weaknesses. FHFA also offered key questions and 

principles for guiding initial decisions that will have to be made about the future of the mortgage market. 
Page i GAO-09-782 

Contents 

Letter 1

Background 5 

The Enterprises Had a Mixed Record on Achieving Housing 

Mission Objectives, and Risk-Management Deficiencies 

Compromised Their Safety and Soundness 10 

Options to Revise the Enterprises’ Structures Aim to Help Ensure 

Housing Mission Achievement, While Mitigating Safety and 

Soundness Risks 28 

A Framework for Identifying and Analyzing the Trade-offs 

Associated with Options to Revise the Enterprises’ Structures, 

and Oversight Structures That Might Help Ensure Their Effective 

Implementation 36 

Federal Efforts to Support Housing Markets during the 

Conservatorships and Certain Terms of Treasury Agreements 

Could Increase the Costs and Challenges Associated with the 

Transition to New Enterprise Structures 50 

Agency Comments and Our Evaluation 55 

Appendix I Objectives, Scope, and Methodology 61 

Appendix II Comments from the Federal Housing Finance 

Agency 63 

Appendix III GAO Contact and Staff Acknowledgments 66 

Tables 

Table 1: Federal Initiatives Designed to Facilitate the Availability of 

Home Mortgage Credit and Housing Opportunities 6 

Table 2: Time Line of Significant Events in Federal Housing 

Finance System 11 

Table 3: Enterprise Compliance with Low- and Moderate-Income 

Numeric Mortgage Purchase Goals, 2002–2008 23 

Table 4: Summary of Options to Revise the Enterprises’ Structures 29 

Table 5: Trade-offs Associated with Enterprise Reform Options as 

They Relate to Long-Established Enterprise Objectives and 

Potential Oversight Structures 37 

 Fannie Mae and Freddie Mac 
Figures 

Figure 1: Enterprises and Private-Label MBS Issuances, 2004–2008 22 

Figure 2: Growth in Enterprises’ Retained Mortgage Portfolios, 

1990–2008 26 

Figure 3: Total Private-Label Mortgage Backed Securities as 

Percentage of the Enterprises Retained Mortgage 

Portfolios, 1998–2007 27 

Page ii GAO-09-782 Fannie Mae and Freddie Mac
Abbreviations 

CBO Congressional Budget Office 

CDBG Community Development Block Grant 

CRS Congressional Research Service 

FHA Federal Housing Administration 

FHFA Federal Housing Finance Agency 

FHFB Federal Housing Finance Board 

FHLBank System Federal Home Loan Bank System 

Ginnie Mae Government National Mortgage Association 

GSE government-sponsored enterprise 

HAMP Home Affordable Modification Plan 

HARP Home Affordable Refinance Program 

HERA Housing and Economic Recovery Act of 2008 

HUD Department of Housing and Urban Development 

LIHTC Low-Income Housing Tax Credit 

MBS mortgage-backed securities 

OCC Office of the Comptroller of the Currency 

OFHEO Office of Federal Housing Enterprise Oversight 

OTS Office of Thrift Supervision 

PC participation certificate 

PIH HUD’s Office of Public and Indian Housing 

SIFMA Securities Industry and Financial Markets 

 Association 

USDA/RD Department of Agriculture’s Rural Development 

 Housing and Community Facilities Programs 

VA Department of Veterans Affairs 

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Page iii GAO-09-782 Fannie Mae and Freddie Mac
Page 1 GAO-09-782 

 

United States Government Accountability Office

Washington, DC 20548 

 

September 10, 2009 

Congressional Committees 

On September 6, 2008, the Federal Housing Finance Agency (FHFA) 

placed Fannie Mae and Freddie Mac into conservatorship out of concern 

that the deteriorating financial condition of the two governmentsponsored enterprises (GSE or enterprise) threatened the stability of 

financial markets.1

 According to FHFA’s former Director, James B. 

Lockhart III, at the time the conservatorships were established, Fannie 

Mae and Freddie Mac had worldwide debt and other financial obligations 

totaling $5.4 trillion, and their default on those obligations would have 

significantly disrupted the U.S. financial system.2

 The Department of the 

Treasury (Treasury) has agreed to provide substantial financial support to 

the enterprises so that they can continue to support mortgage finance 

during the current financial crisis.3

 As of June 30, 2009, Treasury had 

provided about $85 billion in funds to support the enterprises. The 

Congressional Budget Office (CBO) has estimated that the total cost of the 

conservatorships to taxpayers will be $389 billion.4

 The Board of 

Governors of the Federal Reserve System (Federal Reserve) also has 

committed to a variety of activities, including purchasing substantial 

amounts of the enterprises’ debt and securities, to support housing 

finance, housing markets, and the financial markets more generally.5

 While 

1

The Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 (July 30, 2008), 

established FHFA, which is responsible for the safety and soundness and housing mission 

oversight of Fannie Mae, Freddie Mac, and the other housing government-sponsored 

enterprise, the Federal Home Loan Bank System. 

2

Lockhart announced his resignation on August 6, 2009, and left FHFA on August 28, 2009. 

3

On September 7, 2008, Treasury agreed to provide up to $100 billion in financial support to 

each enterprise through the purchase of their preferred stock so that the enterprises 

maintain a positive net worth. In February 2009, Treasury agreed to increase this 

commitment to $200 billion per enterprise. Treasury also agreed to purchase the 

enterprises’ mortgage-backed securities and establish a lending facility to meet their 

borrowing requirements if needed. 

4

The CBO figure is based on its March 2009 estimate that the market value of the 

enterprises’ liabilities exceeded their assets by about $290 billion in 2008–2009 (their 

existing business) and $99 billion in estimated federal subsidy costs for their activities 

between 2010–2019. This estimate can change from one reporting period to the next due to 

fluctuations in market values. 

5

These Federal Reserve activities are described in more detail later in this report. 

 Fannie Mae and Freddie Mac 
 

the conservatorships can remain in place indefinitely as efforts are 

undertaken to stabilize the enterprises and restore confidence in financial 

markets, FHFA has said that the conservatorships were not intended to be 

permanent. Over the longer term, Congress and the Executive Branch will 

face difficult decisions on how to restructure the enterprises and promote 

housing opportunities while limiting risks to taxpayers and the stability of 

financial markets. 

Congress originally established Fannie Mae and Freddie Mac as 

government entities in 1968 and 1989, respectively, chartering them as forprofit, shareholder-owned corporations.6

 They share a primary mission 

that has been to stabilize and assist the U.S. secondary mortgage market 

and facilitate the flow of mortgage credit. To accomplish this goal, the 

enterprises issued debt and stock and used the proceeds to purchase 

conventional mortgages that met their underwriting standards, known as 

conforming mortgages, from primary mortgage lenders such as banks or 

thrifts.7

 In turn, banks and thrifts used the proceeds to originate additional 

mortgages. The enterprises held some of the mortgages that they 

purchased in their portfolios. However, most of the mortgages were 

packaged into mortgage-backed securities (MBS), which were sold to 

investors in the secondary mortgage market.8

 In exchange for a fee (the 

guarantee fee) the enterprises guaranteed the timely payment of interest 

and principal on MBS that they issued. The charter requirements for 

providing assistance to the secondary mortgage markets specify that those 

markets are to include mortgages on residences for low- and moderateincome families. In 1992, Congress instituted authority for requiring the 

enterprises to meet numeric goals set by the Department of Housing and 

 

6

Congress initially chartered Fannie Mae in 1938 but did not establish it as a shareholderowed corporation until 1968. Congress initially established Freddie Mac in 1970 as an entity 

within the FHLBank System and reestablished it as a shareholder-owned corporation in 

1989. 

7

For example, the enterprises typically purchased mortgages with loan-to-value ratios of 80 

percent or less (mortgages with down payments of at least 20 percent) and required private 

mortgage insurance on mortgages with higher loan-to-value ratios. The enterprises also had 

a limit, known as the conforming loan limit, on the size of mortgages purchased by the 

enterprises. Mortgages above this limit are called jumbo mortgages. The conforming 

conventional market differs from other markets, such as the subprime market, which 

generally have differing underwriting standards, or markets where mortgages are insured 

or guaranteed by the federal government, such as through programs that the Federal 

Housing Administration or the Department of Veterans Affairs administers. 

8

Each enterprise’s portfolio also includes MBS that it issued. 

Page 2 GAO-09-782 Fannie Mae and Freddie Mac
 

Urban Development (HUD) on a yearly basis for the purchase of singleand multifamily conventional mortgages that serve targeted groups.9

While the enterprises operated profitably for many years, their structures 

long have been in question. For example, critics questioned the extent to 

which private for-profit corporations could be expected to serve a 

federally mandated housing mission. Furthermore, critics stated that the 

federal government’s sponsorship conveyed certain financial and other 

advantages to the enterprises that encouraged them to engage in riskier 

activities than otherwise would be the case.10 In particular, despite the 

federal government explicitly not guaranteeing the enterprises’ debt and 

MBS or including them in the federal budget, there was an assumption in 

financial markets of an “implied” federal guarantee, which enabled the 

enterprises to borrow at lower rates than other for-profit corporations.11

Critics argued that this implicit government guarantee and access to less 

costly credit created a moral hazard. That is, it encouraged the enterprises 

to assume greater risks and hold less capital than would have been the 

case in the absence of such a guarantee. 

According to former Treasury Secretary Henry M. Paulson, Jr., the FHFA 

conservatorships provide an opportunity for Congress to reconsider the 

nature and structure of the enterprises and make revisions to better 

ensure their safety and soundness as they participate in efforts to stabilize 

the mortgage markets. Researchers and research institutes, financial 

commenters and market participants, and others have made a variety of 

proposals about the future structure of Fannie Mae and Freddie Mac, both 

before and after the establishment of the FHFA conservatorships. Some 

proposals call for converting the enterprises into government entities 

while others advocate privatization or termination. While there is no 

consensus on what the next steps should be, whatever actions Congress 

takes will have profound impacts on the structure of the U.S. housing 

finance system. 

 

9

Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Pub. L. No. 102-

550, title XIII; see 12 U.S.C. §§ 4561-4564. HERA transferred HUD’s authorities and 

responsibilities for the goals to FHFA (§§ 1122, 1128). 

10The enterprises’ charters convey certain other benefits, such as exemptions from state 

and local income taxes. 

11Each enterprise’s charter act specifies that its debt obligations and MBS are to clearly 

indicate that they are not guaranteed by the United States and do not constitute a debt or 

obligation of the United States or any U.S. agency or instrumentality other than the 

enterprise itself. 12 U.S.C. § 1719(b), (d) (Fannie Mae); 12 U.S.C. § 1455(h) (Freddie Mac). 

Page 3 GAO-09-782 Fannie Mae and Freddie Mac
 

We initiated this review under the Comptroller General’s authority to 

provide Congress with information on the roles, benefits, and risks 

associated with the enterprises’ activities in housing finance over the years 

and to help inform the forthcoming deliberation on their future structure. 

Specifically, this report (1) discusses how the enterprises’ roles, 

structures, and activities have changed over time and their performance in 

achieving key housing mission objectives; (2) identifies various options for 

revising the enterprises’ eventual structure; (3) analyzes these options in 

terms of their potential capacity to achieve key housing mission and safety 

and soundness objectives; and (4) discusses how the federal government’s 

management of the conservatorships and response to the housing crisis 

could affect any transition. 

To meet our objectives, we reviewed reports, studies, and data on the 

enterprises and their regulation, including our reports, as well as 

proposals to revise their structures. We also met with researchers who 

wrote relevant reports or were knowledgeable on enterprise-related issues 

and with representatives from FHFA, Treasury, the Federal Reserve, HUD, 

the Government National Mortgage Association (Ginnie Mae), CBO, the 

enterprises, banking and mortgage organizations, the National Association 

of Home Builders, and community groups. Through such research and 

interviews, we sought to identify (1) key housing mission, safety and 

soundness, and other objectives that have been associated with the 

enterprises over the years; (2) options to reform the enterprises’ structures 

and how they would affect these objectives; and (3) principles associated 

with effective regulatory oversight structures. While it is not possible to 

conclusively determine the potential implications of the various proposals, 

we grounded our analysis of likely outcomes on previous research and 

evaluations. We also sought to include, where appropriate, assessments of 

how recent developments in financial markets, particularly actions by 

federal agencies to provide financial support to troubled banks and other 

institutions, could affect the operations of the various options. We 

recognize that a variety of factors could change over time, such as the 

condition of credit markets and the financial performance of the 

enterprises while in conservatorship, which could affect our analysis of 

the options. A more detailed analysis of our objectives, scope, and 

methodology is included in appendix I. 

We conducted this performance audit from October 2008 to September 

2009, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

Page 4 GAO-09-782 Fannie Mae and Freddie Mac
 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

The enterprises constitute one component of a range of federal initiatives 

that, since the 1930s, have facilitated the availability of mortgage credit 

and housing opportunities (see table 1). While these initiatives may involve 

differing missions, structures, and activities, they generally rely on federal 

support and subsidies to achieve their objectives. In some cases, these 

initiatives—such as the Federal Home Loan Bank System (FHLBank 

System), the enterprises’ general mortgage support activities, federal tax 

deductions for mortgage interest, and exemptions for capital gains—apply 

broadly and are designed generally to facilitate mortgage lending and 

homeownership. In other cases, the initiatives have been designed to 

facilitate home ownership and housing opportunities for targeted 

populations and groups. For example, programs administered by the 

Federal Housing Administration (FHA), Department of Veterans Affairs 

(VA), Department of Agriculture’s Rural Development Housing and 

Community Facilities Programs (USDA/RD), and HUD’s Office of Public 

and Indian Housing (PIH) are designed to facilitate homeownership and 

housing opportunities for moderate- and low-income persons, as well as 

first-time buyers, veterans, residents of rural areas, and Native Americans, 

respectively. In some cases, these federal housing initiatives also target 

similar populations and borrowers. For example, through their general 

business activities and affordable housing goal requirements, the 

enterprises, like FHA, provide mortgage credit to low-income borrowers 

and other targeted groups. 

Background 

Page 5 GAO-09-782 Fannie Mae and Freddie Mac
 

Table 1: Federal Initiatives Designed to Facilitate the Availability of Home Mortgage Credit and Housing Opportunities 

Entities that operate in the 

primary mortgage market Purpose 

FHLBank System 

(GSE) 

Established in 1932 by Congress as a GSE to support mortgage lending and related 

community investment. The 12 FHLBanks borrow funds in debt markets and provide their 

members low-cost, long- and short-term advances (loans), which members use to fund 

mortgage loans and maintain liquidity for their operations. Advances are primarily collateralized 

by residential mortgage loans and government and agency securities. Advances are priced at a 

small spread over comparable Treasury obligations. 

FHA 

(government agency in HUD) 

Congress created FHA under the National Housing Act of 1934 to expand opportunities for 

homeownership. FHA provides mortgage insurance on loans made by private lenders. Located 

in HUD since 1965, FHA’s loans generally are for low-income, first-time homebuyers and 

minorities. FHA is legislatively constrained by the dollar amount of loans it can insure. 

VA (federal agency) VA guarantees housing loans for veterans and their families. VA does not impose a maximum 

loan amount that may be guaranteed. However, for certain high-cost counties, county “limits” 

must be used to calculate VA’s maximum guarantee amount. Unlike FHA, VA guarantees only 

a portion of the loan. 

USDA/RD Housing and Community 

Facilities Programs—Loan 

Guarantee Program 

USDA/RD guarantees loans for moderate-income individuals or households to purchase homes 

in rural areas. 

Entities that operate in the 

secondary mortgage market 

Fannie Mae and Freddie Mac 

(GSEs) 

The GSEs guarantee investors in their securities that they will receive their expected principal 

and interest payments. Fannie Mae and Freddie Mac have similar federal charters. The loans 

they purchase are required to be under the legislative conforming limit (currently at $417,000, 

except for high-cost areas that have a limit of $729,750). They also are required to meet 

affordable housing goals for both single- and multifamily housing. 

Ginnie Mae 

(government corporation in HUD) 

It guarantees securities backed by pools of FHA-, VA-, USDA/RD-, and PIH- insured or 

guaranteed mortgages. Specifically, Ginnie Mae guarantees that investors in MBS issued by 

lenders will receive timely principal and interest payments. Ginnie Mae guaranteed MBS have 

the full faith and credit of the federal government. 

Direct outlays 

HUD programs, such as HOME, 

Community Development Block 

Grant (CDBG), Section 8 rental 

assistance, and HOPE VI assistance 

HOME and CDBG provide grants to state or local governments with a flexible funding source to 

meet their diverse affordable housing needs. Section 8 subsidizes rents for low-income 

residents and HOPE VI is used to rebuild or rehabilitate public housing. 

USDA/RD Housing and Community 

Facilities Programs 

USDA/RD makes direct, low-interest loans with no down payments to help low- and moderateincome individuals or households purchase homes and also operates a rental assistance 

program. 

Tax subsidies 

Mortgage interest tax deduction Available to homeowners of all income levels, it allows homeowners who itemize deductions on 

their income tax returns to deduct the interest they pay on their mortgages. 

Treatment of capital gains Individual taxpayers are exempted from paying a capital gains tax on the first $250,000 of 

capital gains ($500,000 for joint filers) from the sale of their principal residence. A principal 

residence is defined as a property that was owned and used as a primary residence for a total 

of at least 2 years during the 5-year period that ended on the date of the sale. 

Page 6 GAO-09-782 Fannie Mae and Freddie Mac
 

Entities that operate in the 

primary mortgage market Purpose 

Mortgage revenue bonds State or local agencies issue tax-exempt bonds, the proceeds of which are used to provide 

below market interest rate mortgages to first-time homebuyers who earn no more than the area 

median income. Most of the costs of the bonds are borne by the federal government in the form 

of lost tax revenue. 

Low-Income Housing Tax Credit 

(LIHTC) 

Created by the Tax Reform Act of 1986, LIHTC has become the primary vehicle for production 

of affordable rental housing in the country. States are authorized to allocate federal tax credits 

as an incentive to the private sector to develop rental housing for low-income households. 

Project investors can claim the tax credit award annually on their tax returns for 10 years. 

Source: GAO. 

Establishment and 

Management of the FHFA 

Conservatorships 

During 2007 and the first half of 2008, Fannie Mae’s and Freddie Mac’s 

financial conditions deteriorated significantly, which FHFA officials said 

prompted the agency to establish the conservatorships. As later described 

in this report, the enterprises incurred substantial credit losses on their 

retained portfolios and their guarantees on MBS. These credit losses 

resulted from pervasive declines in housing prices, as well as specific 

enterprise actions such as their guarantees on MBS collateralized by 

questionable mortgages (mortgages with limited or no documentation of 

borrowers’ incomes), and investments in private-label MBS collateralized 

by subprime mortgages. In July 2008, Fannie Mae’s and Freddie Mac’s 

financial condition deteriorated, which prompted congressional and 

Executive Branch efforts to stabilize the enterprises and minimize 

associated risks to the financial system. In particular, Congress passed and 

the President signed the Housing and Economic Recovery Act of 2008 

(HERA) which, among other things, established FHFA. HERA sets forth 

FHFA’s regulatory responsibilities and supervisory powers, which include 

expanded authority to place the enterprises in conservatorship or 

receivership, and provides Treasury with certain authorities to provide 

financial support to the enterprises, which are discussed below. While 

Treasury and other federal regulatory officials stated in July 2008 that the 

conservatorship or other major measures likely would not be necessary, 

the enterprises’ financial conditions continued to deteriorate. According to 

FHFA and Treasury officials, their ongoing financial analysis of Fannie 

Mae and Freddie Mac in August and early September 2008, as well as 

continued investor concerns about the financial condition of each 

enterprise, resulted in FHFA’s imposition of the conservatorships on 

September 6, 2008, to help ensure the enterprises’ viability, fulfill their 

housing missions, and stabilize financial markets. 

As conservator of the enterprises, FHFA has replaced their Chief 

Executive Officers, appointed new members of the boards of directors, 

Page 7 GAO-09-782 Fannie Mae and Freddie Mac
 

assumed responsibility for overseeing key business decisions, and ceased 

the enterprises’ lobbying activities. While FHFA oversees key enterprise 

business decisions, agency officials said that they expect enterprise 

managers to continue to run day-to-day business activities. FHFA officials 

also said that the agency’s staff continues to oversee the enterprises’ 

safety and soundness and housing mission achievement. For example, 

FHFA officials said that agency examiners are located on-site at each 

enterprise to assess their ongoing financial performance and risk 

management. 

Since FHFA became conservator, the enterprises have been tasked by the 

federal government to help respond to the current housing and financial 

crisis. For example, in November 2008, the enterprises suspended the 

initiation of foreclosure proceedings on mortgages that they held in their 

portfolios or on which they had guaranteed principal and interest 

payments for MBS investors, and this initiative subsequently was extended 

through March 31, 2009. Furthermore, under the administration’s 

Homeowner Affordability and Stability Plan, which was announced on 

February 18, 2009, the enterprises are tasked to (1) provide access to lowcost refinancing for loans they own or guarantee to help homeowners 

avoid foreclosures and reduce monthly payments and (2) initiate a loan 

modification plan for at-risk homeowners that will lower their housing 

costs through a combination of interest rate reductions, maturity 

extensions, and principal forbearance or forgiveness. 

Treasury Has Been 

Providing Financial 

Support to the Enterprises 

during Their 

Conservatorships 

As authorized by HERA, the Secretary of the Treasury entered into 

agreements with Fannie Mae and Freddie Mac on September 7, 2008, to 

provide substantial financial support to the enterprises and thereby 

minimize potential systemic financial risks associated with their 

deteriorating financial condition.12 Specifically, Treasury has entered into 

agreements and announced the following initiatives: 

• Enhance the enterprises’ financial solvency by purchasing their senior 

preferred stock and making funding available on a quarterly basis, to be 

 

12Temporary authority for Treasury to provide financial support provided through the 

purchase of enterprise securities and debt obligations is set forth in section 1117 of HERA. 

Page 8 GAO-09-782 Fannie Mae and Freddie Mac
 

recovered by redemption of the stock or by other means.13 While the initial 

funding commitment for each enterprise was capped at $100 billion, 

Treasury increased the cap to $200 billion per enterprise in February 2009 

to maintain confidence in the enterprises. As of June 30, 2009, Treasury 

had purchased approximately $50.7 billion in Freddie Mac preferred stock 

and $34.2 billion in Fannie Mae preferred stock under the agreements. As 

part of the preferred stock purchase agreement, Treasury has received 

warrants to buy up to 79.9 percent of each enterprise’s common stock for 

$0.00001 per share. The warrants are exercisable at any time and should 

the enterprises’ financial conditions improve sufficiently, the warrants 

would help the government recover some of its investments in the 

enterprises. However, according to CBO, it is unlikely that the federal 

government will recover much of its massive financial investments in the 

enterprises.14 Treasury also is to receive dividends on the enterprises’ 

senior preferred stock at 10 percent per year and, beginning March 31, 

2010, quarterly commitment fees from the enterprises. 

• Purchase MBS until December 31, 2009, when the purchase authority 

expires. From September 2008 through July 2009, Treasury purchased 

$171.8 billion in the enterprises’ MBS. While Treasury’s authority under 

HERA to make such MBS purchases expires at the end of 2009, it may 

continue to hold previously purchased MBS in its portfolio beyond that 

date. 

• Establish a temporary secured credit lending facility that allows the 

enterprises, as well as the FHLBank System, to borrow funds in the event 

they face difficulties issuing debt in financial markets. Under this Treasury 

program, the enterprises are to collateralize any borrowings with their 

MBS and the FHLBanks are to collateralize such borrowings with 

mortgage assets. To date, neither the enterprises nor any FHLBanks have 

used this borrowing authority, and Treasury’s authority for this program 

expires at the end of 2009. 

 

13After the end of any quarter in which either Fannie Mae’s or Freddie Mac’s balance sheet 

reflects that total liabilities exceed total assets, the enterprises have 15 business days to 

request funds under the terms of the agreement. Treasury then has 60 days to provide the 

funds, as necessary, up to the maximum amount of the guarantee. 

14Comparing the amounts Fannie Mae and Freddie Mac have received to date, $34 billion 

and $51 billion respectively, to their income (adjusted to 2008 real dollars) earned during 

the 10-year period that included their highest profits reveals that Fannie Mae has received 

more than 70 percent of its 10-year earnings, and Freddie Mac has received more than 100 

percent of its 10-year earnings. 

Page 9 GAO-09-782 Fannie Mae and Freddie Mac
 

The Federal Reserve also has agreed to acquire substantial amounts of 

debt and MBS of the enterprises and other entities in order to reduce the 

cost and increase the availability of credit for the purchase of homes, and 

to foster improved conditions in financial markets. In November 2008, the 

Federal Reserve announced it would purchase up to $100 billion of debt 

issued by Fannie Mae, Freddie Mac, and the FHLBank System, and up to 

$500 billion in MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie 

Mae. On March 18, 2009, the Federal Reserve announced that during the 

current year it would purchase an additional $100 billion of the 

enterprises’ debt up to a total of $200 billion and an additional $750 billion 

of enterprise MBS up to a total of $1.25 trillion. As of August 19, 2009, the 

Federal Reserve had purchased $111.8 billion in federal agency housing 

debt securities and $609.5 billion in guaranteed MBS.15

The Federal Reserve’s 

Steps to Improve 

Conditions in the Mortgage 

Markets 

To help inform the forthcoming congressional consideration of the 

enterprises’ future purposes and structures, this section discusses key 

aspects of their histories and performance in achieving key housing 

mission and safety and soundness objectives. Specifically, in this section, 

we discuss (1) the enterprises’ changing roles, structures, and activities 

over the years; (2) their performance in supporting mortgage finance 

consistent with charter obligations; (3) the extent to which the numeric 

housing goals may have materially benefited homeownership 

opportunities for targeted groups; and (4) the effect of the enterprises’ 

risk-management practices on their safety and soundness. 

The Enterprises Had a 

Mixed Record on 

Achieving Housing 

Mission Objectives, 

and Risk-Management 

Deficiencies 

Compromised Their 

Safety and Soundness 

Enterprises’ Roles, 

Structures, Activities, and 

Regulatory Oversight 

Underwent Important 

Changes since the 1930s 

As discussed below, the enterprises underwent important structural 

changes over the decades and accrued diverse missions and activities 

relating to the public and for-profit aspects of their structures and 

functions. Table 2 provides a time line that summarizes the key events in 

the federal housing finance system related to the enterprises over the past 

77 years. 

 

15Fannie Mae, Freddie Mac, and the FHLBanks issue securities for federal agency housing 

debt. The guaranteed MBS are those guaranteed by Fannie Mae, Freddie Mac, and Ginnie 

Mae. 

Page 10 GAO-09-782 Fannie Mae and Freddie Mac
 

Table 2: Time Line of Significant Events in Federal Housing Finance System 

1930s: Government stabilized the flow of funds into housing, promoted stability by providing liquidity in housing finance 

through the secondary market, and standardized longer term, fixed-rate mortgages 

1932 FHLBank System was created. 

1934 FHA was created; FHA was given authority to authorize the establishment of privately held national mortgage associations 

for the purchase and sale of mortgages. 

1938 FHA, within its authority, established a national mortgage association, which became Fannie Mae, within FHA for the 

purpose of the purchase and sale of FHA-insured mortages. 

1940s: In the postwar period, housing demand grew rapidly 

1946 Fannie Mae’s predecessor began buying and selling loans guaranteed by VA. 

1948 FHA given authority specifically to charter the Federal National Mortgage Association (Fannie Mae) which received 

statutory authority to buy and sell loans guaranteed by VA. 

1950s: Fannie Mae’s purchases of FHA-insured and VA-guaranteed mortgages increased substantially 

1954 Fannie Mae was chartered specifically to provide liquidity in the mortgage market, and support the mortgage market when 

there was a threat to the stability of the economy. 

1954 The Housing Act reorganized Fannie Mae as a mixed-ownership corporation with eligible shareholders being the federal 

government and lenders that sold mortgages to Fannie Mae. 

1960s: Federal housing agencies were restructured 

1965 FHA became part of HUD, within its Office of Housing. 

1968 Fannie Mae was divided in two: Fannie Mae continued in the secondary market sector as a private, shareholder-owned 

entity with a federal charter overseen by HUD, while the newly created Ginnie Mae guaranteed FHA and VA mortgages 

from within HUD. 

1970s: Freddie Mac was created and Fannie Mae moved into the conventional mortgage market 

1970 Federal Home Loan Mortgage Corporation (Freddie Mac) was created to develop a secondary market for conventional 

mortgage loans. 

1970 Ginnie Mae first issued securities, backed by FHA and VA loans. 

1971 Freddie Mac introduced the first conventional mortgage security, the mortgage participation certificate (PC). 

1972 Fannie Mae bought its first conventional mortgages—those not backed by FHA or VA. 

1980s: Fannie Mae faced challenges with interest-rate risk and Freddie Mac became publicly traded 

Early 

1980s 

Fannie Mae held mortgage assets in portfolio and experienced financial trouble because of high, short-term interest rates; 

the federal government provided financial support. 

1981 Fannie Mae first issued MBS. 

1989 Freddie Mac became a publicly traded, shareholder-owned corporation. 

FHLBank oversight transferred to the Federal Housing Finance Board (FHFB) from the Federal Home Loan Bank Board. 

1990s: Unprecedented growth 

1992 Federal Housing Enterprises Safety and Soundness Act was enacted and established the Office of Federal Housing 

Enterprise Oversight (OFHEO) as an independent agency within HUD to monitor the safety and soundness of the 

enterprises. 

Numeric housing goals were established. 

Mid 

1990s 

Rapid growth in enterprise mortgage portfolios begins. 

Page 11 GAO-09-782 Fannie Mae and Freddie Mac
 

2000s: Housing bubble bursts and the enterprises undertake activities that led to their conservatorships 

Early 

2000s 

Fannie Mae and Freddie Mac started buying Alt-A and subprime mortgage securities. 

2003 Freddie Mac found by OFHEO to have used improper accounting methods. 

2004 Fannie Mae found by OFHEO to have used improper accounting methods. 

2008 HERA created FHFA to oversee Fannie Mae, Freddie Mac, and the FHLBank System, abolished OFHEO and FHFB as 

regulatory agencies, and transferred HUD’s mission authority (including numeric housing goals) to FHFA. 

FHFA placed Fannie Mae and Freddie into conservatorship on September 6, 2008. 

Source: GAO. 

Prior to the 1930s, the federal government did not play a direct role in 

supporting housing finance. Typically lenders—mainly savings and loans 

(thrifts), but also banks—originated short-term mortgages (from 3 to 10 

years). Since thrifts and banks primarily served local markets, regional 

differences in the demand for and supply of mortgage credit resulted in 

regional disparities in mortgage interest rates and credit availability. 

During the Great Depression, thousands of thrifts and banks failed due to 

their credit losses, and housing finance generally became unavailable. 

Created in the 1930s, Fannie 

Mae Initially Provided 

Additional Liquidity to the 

Mortgage Market by Buying 

and Holding FHA Mortgages 

In response, the federal government established institutions and initiatives 

to revive the housing finance market. In 1932, Congress established the 

FHLBank System—the first housing GSE—to provide short-term loans 

(called advances) to member savings and loans institutions that would use 

them to fund home mortgages.16 Additionally, Congress established FHA in 

1934 in part to promote and insure long-term housing mortgages (up to 20 

years) that called for borrowers to pay off the principal and interest of 

loans over a specified number of years.17 Fannie Mae was established by 

FHA under authority provided in 1938 as a government-held association to 

buy and hold mortgages insured by FHA, thereby providing additional 

liquidity to the mortgage market.18 During the 1940s, Congress authorized 

Fannie Mae to purchase VA-guaranteed mortgages to facilitate the efforts 

of veterans to purchase homes.19

The Housing Act of 1954 instituted Fannie Mae as a mixed-ownership 

corporation and specified in its federal charter the entity’s role and 

 

16Federal Home Loan Bank Act, 47 Stat. 725 (July 22, 1932). 

17National Housing Act, 48 Stat. 1246, 1252 (June 27, 1934). 

18National Housing Act Amendments of 1938, 52 Stat. 8, 23 (Feb. 3, 1938). 

1962 Stat. 1207 (July 1, 1948). 

Page 12 GAO-09-782 Fannie Mae and Freddie Mac
 

requirements that subsequently served as some of the enterprises’ key 

housing mission objectives.20 Among its provisions, the act required 

Fannie Mae to (1) provide liquidity for mortgage investments to impro

the availability of capital for home mortgage financing and (2) support t

mortgage market when there was a threat to the stability of the economy. 

The 1954 act also provided Fannie Mae with certain financial benefits 

thought necessary to carry out its objectives, such as exemptions from all 

local taxes except property taxes. Lenders that sold mortgages to Fannie 

Mae were required to purchase stock in it, but the federal government 

remained the enterprise’s majority owner. 

ve 

he 

 

Throughout the late 1950s and 1960s, Fannie Mae’s purchases of FHAinsured and VA-guaranteed mortgages increased substantially. During this 

period, limits on interest rates that banks and thrifts could offer for 

deposits and restrictions on their ability to branch across state lines 

contributed to liquidity constraints and continuing regional disparities in 

mortgage interest rates. By operating across the nation, Fannie Mae could 

help alleviate such scarcities and disparities. 

In 1968, the Housing and Urban Development Act (the 1968 act) 

reorganized Fannie Mae as a for-profit, shareholder-owned company with 

government sponsorship and established Ginnie Mae as an independent 

government corporation in HUD.21 Ginnie Mae’s primary function was to 

guarantee the timely payment of principal and interest from pools of FHA-, 

USDA/RD-, and PIH-insured and VA-guaranteed mortgages. Ginnie Mae 

has the full faith and credit backing of the federal government. Although 

now a for-profit, shareholder-owned company, Fannie Mae continued its 

activities, which were mainly purchasing FHA and VA mortgages. 

According to some financial analysts, Congress largely reorganized Fannie 

Mae as a private company for budgetary purposes (that is, to remove its 

financial obligations from the federal budget). The 1968 act also gave the 

HUD Secretary general regulatory authority over Fannie Mae, as well as 

authority to require that a reasonable portion of its mortgage purchases 

serve low- and moderate-income families. The Secretary subsequently 

established numeric housing goals for Fannie Mae that essentially required 

that at least 30 percent of its purchases serve low- and moderate-income 

families, and at least 30 percent serve families living in central cities. 

Congress Established Fannie 

Mae and Freddie Mac as Forprofit Corporations in 1968 and 

1970, Respectively, to Carry 

Out Housing Missions 

20Housing Act of 1954, Pub. L. No. 68-560 (1954). 

21Housing and Urban Development Act of 1968, Pub. L. No. 90-448 (1968). 

Page 13 GAO-09-782 Fannie Mae and Freddie Mac
 

However, HUD was not given authority to collect data that would be 

necessary to determine compliance with the goals. 

In the Emergency Home Finance Act of 1970, Congress chartered Freddie 

Mac as a housing GSE to help mitigate business challenges facing the thrift 

industry.22 Increasing interest rates had undermined thrifts’ capacity to 

finance long-term mortgages held in their portfolios.23 Freddie Mac was to 

purchase long-term mortgages from thrifts and thereby help stabilize the 

industry and enhance its capacity to fund additional mortgages. As a 

result, Freddie Mac was the first enterprise to develop products to 

facilitate securitization of mortgage loans. Freddie Mac was first owned by 

the Federal Home Loan Bank Board, which regulated the thrift industry. 

Freddie Mac did not become a shareholder-owned company like Fannie 

Mae until it was reorganized in 1989. While subject to HUD’s general 

regulatory oversight under the 1989 legislation, Freddie Mac initially was 

not subject to the same mortgage purchase goals as Fannie Mae. 

Although both Freddie Mac and Fannie Mae were to provide a secondary 

market for conventional mortgages, they pursued markedly different 

business strategies in the 1970s and 1980s. Freddie Mac focused its 

business activities on purchasing conforming, conventional mortgages 

from thrifts and issuing MBS rather than holding mortgages in its portfolio. 

According to a Freddie Mac official, this business strategy was intended to 

help the thrift industry manage interest-rate risk by passing such risk to 

the MBS investors. In contrast, Fannie Mae followed its traditional 

business strategy by purchasing mortgages and holding them in its 

portfolio. During the early 1980s, Fannie Mae experienced substantial 

losses, as did the thrift industry, due to sharply rising interest rates while 

Freddie Mac’s financial performance generally was unaffected. During this 

period, the federal government provided certain financial benefits to 

Fannie Mae, such as regulatory forbearance and tax benefits, to help it 

recover. After Freddie Mac was turned into a for-profit, shareholder-

 

22Emergency Home Finance Act of 1970, Pub. L. No. 91-351, title III (1970). 

23Thrifts generally funded long-term, fixed-rate mortgages that they held in their portfolios 

with deposits, which were regulated. When short-term interest rates rose above levels that 

thrifts were permitted to offer to depositors, depositors sought investment alternatives, 

such as money market funds, that offered higher yields. Thus, thrifts faced difficulties in 

funding their mortgage portfolios. 

Page 14 GAO-09-782 Fannie Mae and Freddie Mac
 

owned corporation in 1989, it began to hold more mortgages in its retained 

portfolio, similar to Fannie Mae.24

By 1992, Congress concluded that the enterprises posed potential safety 

and soundness risks, and regulations that had been in place since 1968 

were inadequate to manage such risks. Over the years, the enterprises had 

become large and complex organizations, and Fannie Mae’s financial 

difficulties in the early 1980s indicated that they posed risks to taxpayers 

and financial stability. Furthermore, HUD had not fulfilled its statutory 

responsibility to monitor the enterprises’ financial operations and risks. 

For example, HUD did not routinely examine the enterprises’ financial 

activities or promulgate regulations necessary to help ensure their safe 

and sound operations. There was also a concern that the enterprises were 

not adequately serving the mortgage credit needs of low- and moderateincome borrowers and other targeted groups due to their potentially 

higher default risks. In a 1996 report, we noted that, in 1992, there was a 

perception that the enterprises’ distribution of conventional, conforming 

loan funding to low- and moderate-income borrowers was lagging behind 

the primary mortgage market, and a Federal Reserve study was consistent 

with this perception.25 Moreover, HUD did not enforce the housing goals—

which at that time applied only to Fannie Mae—or collect the data 

necessary to do so. 

Congress Revised Enterprise 

Regulation in 1992 to Better 

Ensure Safety and Soundness 

and Help Manage the Potential 

Conflict between Their Profit 

Motives and Housing Missions 

In enacting the Federal Housing Enterprises Safety and Soundness Act of 

1992 (the 1992 Act), Congress fundamentally revised regulation of the 

enterprises and took steps to clarify Fannie Mae’s and Freddie Mac’s roles 

within the housing finance system and better define their public housing 

mission responsibilities. For example, the 1992 Act reiterated the 

enterprises’ long-standing obligations to support mortgage finance through 

secondary market activities, including during stressful economic periods, 

and clarified and expanded the enterprises’ charter obligations to facilitate 

the flow of mortgage credit serving targeted groups. Moreover, the 1992 

Act set forth oversight authority and mechanisms to better manage 

 

24Freddie Mac became a publicly held corporation under the charter set forth in the 

Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73 § 

731. 

25GAO, Housing Enterprises: Potential Impacts of Severing Government Sponsorship, 

GAO/GGD-96-120 (Washington, D.C.: May 13, 1996) and Glenn B. Canner and Wayne 

Passmore, “Residential Lending to Low-Income and Minority Families: Evidence from the 

1992 HMDA Data,” Federal Reserve Bulletin, February 1994, 70-108. 

Page 15 GAO-09-782 Fannie Mae and Freddie Mac
 

potential conflicts between the enterprises’ profit motivations and housing 

missions. 

• First, it established OFHEO as an independent agency in HUD responsible 

for the enterprises’ safety and soundness. Among other things, OFHEO 

was given supervisory authority to establish and monitor compliance with 

minimum and risk-based capital standards and conduct routine safety and 

soundness examinations. In so doing, Congress established a safety and 

soundness regulatory framework that resembled the supervisory 

framework for insured depository institutions such as banks and thrifts, 

although OFHEO’s authority was less extensive. 

• Second, the 1992 Act expanded the enterprises’ previous housing mission 

responsibilities by requiring them to meet specific annual goals for the 

purchase of mortgages serving targeted groups. Specifically, it directed the 

HUD Secretary to promulgate regulations setting annual housing goals for 

both Fannie Mae and Freddie Mac for the purchase of mortgages serving 

low- and moderate-income families; special affordable housing for families 

(i.e., low-income families in low-income areas, and very low-income 

families); and housing located in central city, rural, and other underserved 

areas. The 1992 Act also provided HUD with the authority to collect data 

necessary to monitor the enterprises’ compliance with the goals and to 

enforce such compliance. It should be noted that the enterprises’ 

affordable housing goals required them to compete with other federal 

initiatives to support housing, particularly FHA’s mortgage insurance 

programs that also primarily serve low- and moderate-income borrowers 

and first-time homeowners. This issue is discussed in more detail later in 

this report. 

• Third, the 1992 Act set forth HUD’s regulatory authority over the 

enterprises and specified procedures that HUD must follow when 

reviewing and approving new mortgage program proposals by the 

enterprises. That is, it directed the HUD Secretary to approve any new 

program that an enterprise proposed, unless the Secretary determined that 

the program violated the enterprise’s charter or would not be in the public 

interest. Additionally, the 1992 Act required the HUD Secretary, for a 

specified transition period, to reject a new program proposal if the 

Director of OFHEO determined that the proposal would risk a significant 

financial deterioration of the enterprise. 

Page 16 GAO-09-782 Fannie Mae and Freddie Mac
 

While the 1992 Act enhanced the enterprises’ regulatory structure in 

several important respects, it still had important limitations in its capacity 

to ensure the enterprises’ safety and soundness and housing mission 

compliance. First, federal oversight of the enterprises and the FHLBank 

System was divided among OFHEO, HUD, and FHFB—which was the 

safety and soundness and housing mission regulator for the FHLBank 

System. However, OFHEO and FHFB were small agencies that lacked the 

resources necessary to monitor large and complex financial organizations 

from the standpoint of safety and soundness, as well as mission goals. 

Furthermore, as compared with federal bank regulators, both OFHEO and 

FHFB lacked key authorities—such as authority to take enforcement 

actions based on declining capital levels and unsound financial practices—

that were available to federal bank regulators.26

Despite Improvements, 

Limitations in Oversight 

Continued to Affect The 

Enterprises’ Safety and 

Soundness and Mission 

Compliance 

Enterprise regulation also had limited capacity to address potential 

conflicts between the enterprises’ profit motivations and their federally 

mandated housing missions. In particular, we noted that, due to the 

financial benefits derived from their federal charters and their dominant 

position within the mortgage finance system, the enterprises had financial 

incentives to engage in potentially profitable activities that were not fully 

consistent with their charter obligations and restrictions.27 For example, 

Freddie Mac, during the mid-1990s, had invested in nonmortgage assets, 

such as long-term corporate bonds, that potentially allowed the enterprise 

to earn higher returns based on the enterprises’ funding advantage.28

Freddie Mac argued that its investments in nonmortgage assets were 

permissible and necessary to help manage the liquidity of its investment 

portfolio. Although HUD had general regulatory and new mortgage 

program authorities, it was not clear if HUD was well-positioned to assess 

such arguments or the extent to which the enterprises may have been 

straying from their charter obligations and restrictions. At that time, HUD 

officials said that they lacked staff with the expertise necessary to oversee 

large and complex financial institutions and determine if the enterprises’ 

 

26For a comparison of these authorities, see GAO, Comparison of Financial Institution 

Regulators’ Enforcement and Prompt Corrective Action Authorities, GAO-01-322R

(Washington, D.C.: Jan. 31, 2001). 

27GAO, Government-Sponsored Enterprises: A Framework for Strengthening GSE 

Governance and Oversight, GAO-04-269T (Washington, D.C.: Feb. 10, 2004) and GAO, 

Government-Sponsored Enterprises: Federal Oversight Needed for Nonmortgage 

Investments, GAO/GGD-98-48 (Washington, D.C.: July 28, 1998). 

28GAO/GGD-98-48. 

Page 17 GAO-09-782 Fannie Mae and Freddie Mac
 

activities were consistent with their charters and housing finance 

missions. 

By retaining the enterprises’ off-budget status as GSEs, the 1992 Act 

permitted a continuation of the lack of transparency about the enterprises’ 

risks and potential costs to taxpayers. Under the Federal Credit Reform 

Act of 1990, the potential costs associated with many direct federal loan 

and loan guarantee programs have to be disclosed in the federal budget.29

Congress and the Executive Branch can use such disclosures to assess the 

potential costs and future risks of such programs and take steps on a 

timely basis to potentially mitigate such costs and risks (for example, 

tightening eligibility criteria). Despite the implied federal guarantee of 

their obligations, the government’s exposure in connection with the 

enterprises is not disclosed in the federal budget because GSE activities 

were excluded from the federal budget totals.30 The 1992 Act did not 

change the status of the enterprises as off-budget entities. However, it 

should be noted that such financial disclosures could have involved an 

offsetting risk. Such treatment might have increased the perception that, 

despite the enterprises’ statements to the contrary, the federal government 

would provide financial support to them in an emergency, which may have 

further reduced market discipline and enterprise actions to mitigate risks. 

Congress substantially revised the enterprises’ regulatory structure with 

the passage of HERA in 2008. In HERA, Congress abolished OFHEO and 

FHFB and established FHFA as the regulator of the enterprises and the 

FHLBank System. HERA charges FHFA with responsibility for housing 

GSE safety and soundness. In this regard, HERA augments the safety and 

soundness responsibilities and authorities administered by the 

predecessor agencies. Additionally, HERA transferred responsibility for 

the enterprises’ mission oversight, including their satisfaction of numeric 

goals for purchases of mortgages to low- and moderate-income borrowers 

and the review and approval of enterprise new mortgage programs, from 

HUD to FHFA. FHFA’s supervisory authority over safety and soundness 

 

29Pub. L. No. 101-508, title XIII (1990). Under the act, the credit subsidy cost of direct loans 

and loan guarantees is the net present value of the estimated long-term cost to the 

government at the time the credit is provided of such programs, less administrative 

expenses. The act was intended to improve disclosures about the risks associated with 

government direct loans and guarantee programs and assist Congress in making budget 

decisions about such programs. 

30GAO, Budget Issues: Profiles of Government-Sponsored Enterprises, GAO/AFMD-91-17

(Washington, D.C.: February 1991). 

Page 18 GAO-09-782 Fannie Mae and Freddie Mac
 

matters includes specific authority to place the housing GSEs into 

conservatorship or receivership based on grounds set forth in HERA. 

Since placing Fannie Mae and Freddie Mac into conservatorship in 

September 2008, FHFA has appointed new Chief Executive Officers and 

boards of directors at each enterprise and stands in lieu of shareholders in 

matters of corporate governance. In contrast, FHFA’s role with respect to 

the FHLBank System has remained solely that of an independent 

regulator. 

The Enterprises’ 

Performance in Achieving 

Key Housing Finance 

Support Objectives Has 

Been Mixed 

It is generally accepted that the enterprises have been successful in 

enhancing liquidity in the mortgage finance system as directed in their 

charters. We have reported that the enterprises established a viable 

secondary mortgage market for conventional loans that enabled capital to 

flow to areas with the greatest demand for mortgage credit.31 This free 

flow of capital tended to equalize interest rates across regions for 

mortgages with similar risk characteristics. However, the removal of 

restrictions on the ability of banks and thrifts to pay market rates for 

deposits and to operate across state lines also have contributed to 

mortgage liquidity and the establishment of an integrated national 

mortgage finance system. 

The enterprises’ activities also have been credited with achieving other 

benefits consistent with their charter obligations to support mortgage 

finance, which include the following: 

• Lowering mortgage interest rates on qualifying mortgages below what they 

otherwise would be. GAO and others have stated that the advantageous 

borrowing rates that the enterprises derived from the implied federal 

guarantee on their financial obligations were passed on to borrowers to 

 

31GAO/GGD-96-120. 

Page 19 GAO-09-782 Fannie Mae and Freddie Mac
 

some degree, although estimates vary.32 However, we also have noted that 

these benefits were not entirely passed along to homebuyers. Rather, the 

enterprises’ shareholders and senior management also benefited for many 

years from the relatively higher profits that the companies achieved due to 

cost savings associated with the implied guarantee. 

• Establishing standard underwriting practices and forms for conventional 

mortgages. Due to the enterprises’ large purchases of conventional 

mortgages each year, their underwriting guidelines and forms became the 

industry standard. GAO and others have found that standardization 

facilitated the efficiency of the mortgage underwriting process and 

resulted in cost savings for lenders and borrowers. The enterprises’ efforts 

to standardize mortgage underwriting likely also helped develop the MBS 

market, as consistent standards are viewed as critical for helping investors 

evaluate risks. 

However, the extent to which the enterprises have been able to support a 

stable and liquid secondary mortgage market during periods of economic 

stress, which are key charter and statutory obligations, is not clear. In 

1996, we attempted to determine the extent to which the enterprises’ 

activities would support mortgage finance during stressful economic 

periods by analyzing Fannie Mae’s mortgage activities in some states, 

including oil producing states such as Texas and Louisiana, beginning in 

the 1980s.33 Specifically, we analyzed state-level data on Fannie Mae’s 

market shares and housing price indexes for the years 1980–1994. We did 

not find sufficient evidence that Fannie Mae provided an economic 

cushion to mortgage markets in those states during the period analyzed. 

 

32In 1996, we reported on our participation in research with CBO, HUD, and Treasury that, 

among other things, included analysis on the degree the advantageous borrowing rates the 

enterprises derived from their government sponsorship was passed on to borrowers. We 

estimated that the benefit to homebuyers on interest rates on fixed rate single family 

mortgages below the conforming loan limits ranged from 15–35 basis points (a basis point 

is equal to one one-hundredth of a percent). This amounted to a savings of about $10–25 on 

the monthly payments on a $100,000 mortgage balance. See GAO-96-120. More recent 

research conducted by Federal Reserve staff suggests that the savings to borrowers from 

the enterprises’ activities range from 0–7 basis points. See Passmore, Wayne, Shane M. 

Sherlund, and Gilliam Burgess, “The Effect of Housing Government-Sponsored Enterprises 

on Mortgage Rates,” Real Estate Economics, Vol. 33, Fall 2005, pp. 427-463; and Passmore, 

Wayne, Diana Hancock, Andreas Lehnert, and Shane Sherlund, “Federal Reserve Research 

on Government-Sponsored Enterprises,” Proceedings from the 42th Annual Conference on 

Bank Structure and Competition, May 2006. 

33GAO/GGD-96-120. 

Page 20 GAO-09-782 Fannie Mae and Freddie Mac
 

During the current financial crisis, the enterprises have provided critical 

support to mortgage finance, but only with the benefit of substantial 

financial assistance provided by Treasury and the Federal Reserve during 

the conservatorships. As shown in figure 1, the enterprises and Ginnie Mae 

accounted for nearly 60 percent of MBS issuances in 2006, while privatelabel issuances, such as MBS collateralized by pools of subprime and 

jumbo mortgages, accounted for nearly 40 percent. By the end of 2008, the 

enterprises and Ginnie Mae accounted for about 97 percent of MBS 

issuances, while private-label issuances stood at about 3 percent due to 

the collapse of many subprime lenders and the associated reduction in 

nonconforming mortgage origination and precipitous downturn in 

securitization markets. According to FHFA’s former Director, one of the 

reasons that the agency established the conservatorships in September 

2008 is that the financial challenges the enterprises were facing as 

independent entities compromised their capacity to support mortgage 

finance. For example, the enterprises’ mortgage purchases slowed in 2008, 

and they planned to raise certain fees to help offset their losses. While the 

enterprises are now a critical component of the federal government’s 

response to the housing crisis, such support would not be possible without 

Treasury’s financial support and the Federal Reserve’s plans to purchase 

almost $1.45 trillion of their MBS and debt obligations as well as those of 

other entities.34

 

34In addition to the enterprises’ MBS and debt obligations, the Federal Reserve’s purchases 

include FHLBank debt obligations and Ginnie Mae guaranteed MBS. 

Page 21 GAO-09-782 Fannie Mae and Freddie Mac
 

Figure 1: Enterprises and Private-Label MBS Issuances, 2004–2008 

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2004 2005 2006 2007 2008

In millions

Year

Private label

GSEs and Ginnie Mae

Source: GAO analysis of data from Securities Industry and Financial Markets Association.

63.9%

57.0%

59.5%

72.1%

97.0%

36.1%

43.0%

27.9% 40.5% 3.0%

Evidence to Support 

Effectiveness of 

Enterprises’ Program to 

Increase Purchases of 

Mortgages Serving 

Targeted Groups Is Limited 

While the enterprises’ numeric housing goal mortgage purchase program 

has been in place for more than 10 years, its effectiveness in supporting 

homeownership opportunities for targeted groups and areas is not clear. 

Pursuant to the 1992 Act, HUD established interim goals for 1993 and 1994, 

which were extended through 1995, and final goals for the period from 

1996 through 1999. In 1998, we found these were conservative goals, which 

placed a high priority on maintaining the enterprises’ financial 

soundness.35 For example, according to research conducted by HUD and 

OFHEO, the additional mortgage purchases required under the goals were 

modest and would not materially affect the enterprises’ financial 

condition. HUD also established housing goals in 2000 (covering 2001–

2004) and in 2004 (covering 2005–2008). According to a speech by the FHA 

Commissioner in 2005, the 2004 goals established significantly higher 

requirements than the 2000 goals. 

 

35GAO, Federal Housing Enterprises: HUD’s Mission Oversight Needs to Be Strengthened, 

GAO/GGD-98-173 (Washington, D.C.: July 28, 1998). 

Page 22 GAO-09-782 Fannie Mae and Freddie Mac
 

According to HUD data, the enterprises generally have met the numeric 

housing goals since the beginning of the program. For example, table 3 

shows that Fannie Mae and Freddie Mac met the low- and moderateincome housing goals in place from 2002 through 2007. However, the 

enterprises failed to meet this goal in 2008, and, according to HUD, did not 

meet certain subgoals in 2007. 

Table 3: Enterprise Compliance with Low- and Moderate-Income Numeric Mortgage Purchase Goals, 2002–2008 

Percentage of low- and moderate-income purchases 

2002 2003 2004 2005 2006 2007 2008

Goal 50.0 50.0 50.0 52.0 53.0 55.0 56.0

Fannie Mae performance 51.8 52.3 53.4 55.1 56.9 55.5 53.6

Freddie Mac performance 50.3 51.2 51.6 54.0 55.9 56.1 51.5

Source: GAO. 

Note: Under the goals, in 2002 for example, half of each enterprise’s total mortgage purchases were 

to serve borrowers who qualified as being low- and moderate-income under HUD’s definition. (See 

GAO/GGD-98-173). 

Although the enterprises generally satisfied the numeric purchase goals 

through 2007, HUD and independent researchers have had difficulty 

identifying tangible benefits for targeted groups associated with the 

enterprises’ purchase program. In setting higher housing goals beginning 

in 2005, HUD stated that the intent was to encourage the enterprises to 

facilitate greater financing and homeownership opportunities for the 

groups targeted by the goals. HUD concluded that, although the 

enterprises had complied with previous goals, they continued to serve less 

of the affordable housing market than was served by conventional 

conforming primary market lenders during those years. Furthermore, 

recent research indicates that, although the enterprises have enhanced 

their product offerings to meet the housing goals, the effects of the 

housing goals on affordability and opportunities for target groups have 

been limited. For example, a 2003 study that modeled the impacts of the 

housing goals found that the enterprises likely increased credit in 

specified areas in only 1 of the 5 years included in the model.36 A 2006 

study concluded that the enterprises’ purchases of mortgages in certain 

targeted low- and moderate-income areas (census tracts in California 

 

36Brent Ambrose and Thomas Thibodeau, “Have the GSE Affordable Housing Goals 

Increased the Supply of Mortgage Credit?” Regional Science and Urban Economics 34 

(2004). 

Page 23 GAO-09-782 Fannie Mae and Freddie Mac
 

during the 1990s with depressed housing markets) generally did not 

increase homeownership rates as compared with other low- and moderateincome areas that were not specifically targeted by the numeric housing 

goals. The research found only one low-income target area (in San 

Francisco) that showed improvements in homeownership rates as a result 

of the enterprises’ activities.37

Another study suggested that enterprise-FHA interactions in the same 

areas may help explain why the program’s benefits were limited.38 While 

the enterprises’ numeric mortgage purchase program and FHA’s mortgage 

insurance were intended to benefit similar targeted groups, such as lowincome and minority borrowers, the study suggested that the programs 

may have offset each other. That is, as the enterprises increased their 

mortgage purchases in areas with concentrations of targeted groups, FHA 

activity declined in those areas. According to the study, while the 

relatively lower costs of conventional loans compared with FHA-insured 

loans provided benefits for those households able to switch to a 

conventional loan, this cost differential also permitted the enterprises to 

attract an increasing share of the most creditworthy targeted borrowers in 

these areas, which FHA had served before. In response to losing its more 

creditworthy borrowers, FHA could have retained market share by 

reaching for borrowers that represented greater credit risks and either 

(1) accepted the riskier portfolio wholesale or (2) increased premiums to 

insure itself against expected losses. However, the study concluded that 

FHA applied stricter underwriting standards and reduced its loan volume. 

Therefore, the overall impact of the two programs on promoting 

homeownership opportunities in these areas was limited. After 2002, both 

the enterprises’ and FHA’s market share declined in areas with 

concentrations of low-income and minority groups as subprime lending 

grew in size, which may have limited the impact of both the enterprises’ 

housing goal program and FHA’s mortgage insurance activities.39

 

37Raphael Bostic and Stuart Gabriel, “Do the GSEs Matter to Low-income Housing Markets? 

An Assessment of the Effects of GSE Loan Purchase Goals on California Housing 

Outcomes,” Journal of Urban Economics 59 (2006). 

38Xudong An and Raphael Bostic, “GSE Activity, FHA Feedback, and Implications for the 

Efficacy of the Affordable Housing Goals,” Journal of Real Estate Finance and Economics 

36 (2008). 

39See, GAO, Federal Housing Administration: Decline in the Agency’s Market Share Was 

Associated with Product and Process Developments of Other Mortgage Market 

Participants, GAO-07-645 (Washington, D.C.: June 29, 2007). 

Page 24 GAO-09-782 Fannie Mae and Freddie Mac
 

Earlier research sponsored by HUD in 2001 largely discounted the alleged 

benefits for affordable multifamily finance resulting from the enterprises’ 

numeric mortgage goals.40 According to the research, the enterprises 

generally did not play a leading role in affordable multifamily mortgage 

finance because their underwriting standards were considered 

conservative and fairly inflexible, compared with other multifamily 

mortgage providers. In contrast, representatives from mortgage finance, 

housing construction, and consumer groups we contacted said that the 

benefits from the enterprises’ purchases of affordable multifamily 

mortgages pursuant to their goals have been significant. The 

representatives said that the enterprises’ involvement and, in some cases, 

guarantees on the financing of affordable multifamily projects, which may 

be complex and involve a variety of government and private-sector 

entities, were crucial to their successful completion. In addition, the 

representatives said that the enterprises were the only source of funding 

for multifamily projects because many other traditional providers, such as 

banks and insurance companies, largely have withdrawn from the market 

during the current financial crisis. 

The Enterprises’ Riskmanagement and 

Operational Practices 

Have Been Deficient 

While housing finance may have derived some benefits from the 

enterprises’ activities over the years, GAO, federal regulators, researchers, 

and others long have argued that the enterprises had financial incentives 

to engage in risky business practices to strengthen their profitability partly 

because of the financial benefits derived from the implied federal 

guarantee on their financial obligations. For example, during the late 1990s 

and early 2000s, we raised concerns about the rapid growth of the 

enterprises’ retained mortgage portfolios, which reached about $1.6 

trillion by 2005 (see fig. 2). Although increasing the size of their mortgage 

portfolios may have been more profitable than issuing MBS, it also 

exposed the enterprises to significant interest-rate risk. We reported that 

the rapid increase in the enterprises’ mortgage portfolios and the 

associated interest-rate risk did not result in a corresponding benefit to the 

achievement of their housing missions. For example, the rapid growth in 

the enterprises’ retained mortgage portfolios in the late 1990s, and in 2003 

through 2004, occurred during periods of strong economic growth when 

mortgage markets did not necessarily require the enterprises to be robust 

portfolio lenders. 

 

40Abt Associates, “Study of the Multifamily Underwriting and the GSEs’ Role in the 

Multifamily Market: Final Report,” prepared for HUD (August 2001). 

Page 25 GAO-09-782 Fannie Mae and Freddie Mac
 

Figure 2: Growth in Enterprises’ Retained Mortgage Portfolios, 1990–2008 

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1990 2000 2001 2002 2003 2004 2005 2006 2007

Portfolios (in trillions)

Source: OFHEO Report to Congress, April 15, 2008.

Year

Total GSE retained portfolios

Fannie Mae retained portfolios

Freddie Mac retained portfolios

In 2003 and 2004, OFHEO found that Freddie Mac and Fannie Mae 

manipulated accounting rules so that their public financial statements 

would show steadily increasing profits over many years and thereby 

increase their attractiveness to potential investors. The misapplication of 

accounting rules generally involved standards for reporting on derivatives, 

which the enterprises used to help manage the interest-rate risks 

associated with their large retained mortgage portfolios. According to 

investigative reports, the enterprises also may have manipulated their 

financial reports to show consistently increasing profits to help ensure 

senior executives would receive bonuses. OFHEO also found that the 

enterprises lacked key operational capacities, such as information systems 

and personnel, necessary to manage large mortgage portfolios and 

account for them correctly. The enterprises were required to restate their 

financial statements and adjust their earnings reports by billions of dollars. 

While the enterprises were subject to increased OFHEO scrutiny because 

of these accounting and operational deficiencies in 2004 and 2005, they 

still embarked on aggressive strategies to purchase mortgages and 

mortgage assets with questionable underwriting standards. For example, 

Page 26 GAO-09-782 Fannie Mae and Freddie Mac
 

they purchased a large volume of what are known as Alt-A mortgages, 

which typically did not have documentation of borrowers’ incomes and 

had higher loan-to-value ratio or debt-to-income ratios. Furthermore, as 

shown in figure 3, enterprise purchases of private-label MBS increased 

rapidly as a percentage of retained mortgage portfolios from 2003 through 

2006. By the end of 2007, the enterprises collectively held more than $313 

billion in private-label MBS, of which $94.8 billion was held by Fannie Mae 

and $218.9 billion held by Freddie Mac. According to some commenters, 

the 2004 increase in housing goals provided the enterprises with incentives 

to purchase mortgage assets, such as Alt-A mortgages and private-label 

MBS collateralized by subprime and Alt-A mortgages,that in large degree 

served targeted groups. However, former FHFA Director Lockhart stated 

that the enterprises’ primary motivation in purchasing such assets was to 

restore their share of the mortgage market, which declined substantially 

from 2004 through 2007 as the “nontraditional” (for example, subprime) 

mortgage market rapidly increased in size. FHFA further stated that the 

enterprises viewed such mortgage assets as offering attractive riskadjusted returns. 

Figure 3: Total Private-Label Mortgage Backed Securities as Percentage of the Enterprises Retained Mortgage Portfolios, 

1998–2007 

0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Percentage

Source: OFHEO Report to Congress, April 15, 2008.

Year

Fannie Mae

Freddie Mac

Page 27 GAO-09-782 Fannie Mae and Freddie Mac
 

According to FHFA, while these questionable mortgage assets accounted 

for less than 20 percent of the enterprises’ total assets, they represented a 

disproportionate share of credit-related losses in 2007 and 2008. For 

example, by the end of 2008, Fannie Mae held approximately $295 billion 

in Alt-A loans, which accounted for about 10 percent of the total singlefamily mortgage book of business (mortgage assets held in portfolio and 

mortgages that served as collateral for MBS held by investors). Similarly, 

Alt-A mortgages accounted for nearly half of Fannie Mae’s $27.1 billion in 

credit losses of its single-family guarantee book of business in 2008. At a 

June 2009 congressional hearing, Lockhart said that 60 percent of the 

AAA-rated, private-label MBS purchased by the enterprises have since 

been downgraded to below investment grade.41 He also stated that investor 

concerns about the extent of the enterprises’ holdings of such assets and 

the potential associated losses compromised their capacity to raise needed 

capital and issue debt at acceptable rates. 

The enterprises’ mixed records in achieving their housing mission 

objectives and the losses and weaknesses that resulted in the 

conservatorships reinforce the need for Congress and the Executive 

Branch to fundamentally reevaluate the enterprises’ roles, structures, and 

business activities in mortgage finance. Researchers and others believe 

that there is a range of options available to better achieve housing mission 

objectives (in some cases through other federal entities such as FHA), help 

ensure safe and sound operations, and minimize risks to financial stability. 

These options generally fall along a continuum with some overlap among 

key features and advocate (1) establishing a government corporation or 

agency, (2) reconstituting the enterprises as for-profit GSEs in some form, 

or (3) privatizing or terminating them (see table 4). This section discusses 

some of the key principles associated with each option and provides 

details on how each could be designed to support housing objectives. 

Options to Revise the 

Enterprises’ 

Structures Aim to 

Help Ensure Housing 

Mission Achievement, 

While Mitigating 

Safety and Soundness 

Risks 

 

41House Committee on Financial Services, Subcommittee on Capital Markets, Insurance, 

and Government Sponsored Enterprises, testimony of James B. Lockhart III, “The Present 

Condition and Future Status of Fannie Mae and Freddie Mac,” 111th Cong., 2nd sess., June 

3, 2009. 

Page 28 GAO-09-782 Fannie Mae and Freddie Mac
 

Table 4: Summary of Options to Revise the Enterprises’ Structures 

Potential structure Proposed function 

Government corporation or agency Focus on purchasing qualifying mortgages and issuing MBS but eliminate mortgage 

portfolios, which are complex to manage and can result in losses due to fluctuations in 

interest rates. Responsibilities for promoting homeownership for targeted groups could be 

transferred to the FHA, which insures mortgages for low-income and first-time borrowers. 

Reestablish for-profit enterprises with 

government sponsorship 

Restore the enterprises to their preconservatorship status but add controls to minimize 

risk. These controls might include eliminating or reducing the enterprises’ mortgage 

portfolios or subjecting the enterprises to public utility-type regulation, which involves 

business activity restrictions and profitability limits, and establishing executive 

compensation limits. Convert enterprises from publicly-traded, shareholder-owned 

corporations to cooperative associations owned by mortgage lenders. 

Privatization or termination Abolish the enterprises in their present form and disperse mortgage lending and risk 

management throughout the private sector. Some proposals involve the establishment of a 

federal mortgage insurer to help protect mortgage lenders against catastrophic mortgage 

losses. 

Source: GAO. 

Government Corporation 

or Agency 

Some proposals advocate that, after the FHFA conservatorships are 

terminated, consideration should be given to establishing a government 

corporation or agency to assume responsibility for key enterprise business 

activities.42 Supporters of these proposals maintain that the combination of 

the implied federal guarantee on the enterprises’ financial obligations, and 

their need to respond to shareholder demands to maximize profitability, 

encouraged excessive risk-taking and ultimately resulted in their failures. 

Accordingly, they also believe that a government corporation or agency, 

which would not be concerned about maximizing shareholder value, 

would be the best way to ensure the availability of mortgage credit for 

primary lenders, while minimizing the risks associated with a for-profit 

structure with government sponsorship. Establishing a government 

corporation or agency also would help ensure transparency in the federal 

government’s efforts through appropriate disclosures of risks and costs in 

the federal budget. 

Under one proposal, a government corporation would assume 

responsibility for purchasing conventional mortgages from primary 

 

42See, for example, Dwight M. Jaffee, “Reforming Fannie and Freddie,” Regulation, Winter 

2008-2009, 52-57, and Thomas H. Stanton, “Lessons from Public Administration: 

Recommendations for the Future of Fannie Mae and Freddie Mae,” presented to the 45th 

Annual Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago, 

May 7, 2009. 

Page 29 GAO-09-782 Fannie Mae and Freddie Mac
 

lenders and issuing MBS.43 However, under this proposal, the enterprises’ 

retained mortgage portfolios would be eliminated over time because of 

their interest-rate risk and associated safety and soundness concerns. 

Taxpayer protections would come from sound underwriting standards and 

risk-sharing arrangements with the private sector. The government 

corporation also would be required to establish financial and 

accountability requirements for lenders and institute consumer protection 

standards for borrowers as appropriate. 

While this proposal advocates the establishment of a government 

corporation to replace Fannie Mae and Freddie Mac, it states that there 

are risks associated with doing so. For example, a government corporation 

might face challenges retaining capable staff or become overly 

bureaucratic and unreceptive to market developments. Accordingly, the 

proposal includes a provision that the government corporation should be 

carefully reevaluated to ensure that it does not “ossify” over time. The 

proposal also concludes that the new government corporation either 

“sunset” (terminate) after 5 years if the market has stabilized or be allowed 

to continue under a renewable charter that would require periodic 

reviews. 

Under a second proposal, a government corporation or agency also would 

focus on issuing MBS rather than maintaining a retained mortgage 

portfolio.44 Borrowers would be charged actuarially based premiums to 

help offset the risks associated with the government corporation’s or 

agency’s activities. For example, mortgages with a 10 percent or lower 

down payment would be subject to a higher premium than mortgages with 

a 20 percent down payment. The government corporation or agency also 

would focus its activities on middle-income borrowers, and the mortgage 

credit needs of targeted groups would be served by an expansion of FHA’s 

mortgage insurance programs. The proposal suggests that specific 

appropriations to FHA represent a more efficient means to assist lowincome borrowers than seeking to assist such borrowers through the 

enterprises’ activities. A third proposal advocates that the government 

provide funding directly to targeted borrowers though down-payment 

 

43Stanton, “Lessons from Public Administration.” 

44Jaffee, “Reforming Fannie and Freddie.” 

Page 30 GAO-09-782 Fannie Mae and Freddie Mac
 

assistance rather than relying on the enterprises’ mortgage purchase 

program.45

For purposes of comparison, we note that Ginnie Mae is an existing 

government corporation that performs important functions in the 

secondary markets for government guaranteed and insured mortgage 

loans. Specifically, Ginnie Mae guarantees the timely payment of principal 

and interest on MBS that are collateralized by pools of mortgages that are 

insured or guaranteed by FHA, VA, PIH, and USDA/RD. However, Ginnie 

Mae does not perform functions that are envisioned for a government 

corporation or agency that might replace Fannie Mae and Freddie Mac. In 

particular, Ginnie Mae does not issue MBS, as do Fannie Mae and Freddie 

Mac. Moreover, Ginnie Mae is not responsible for monitoring the 

underwriting or the credit risk associated with the mortgages that 

collateralize the MBS pools but instead relies on FHA, VA, PIH, and 

USDA/RD to do so. 

Reconstituted GSEs While many of the enterprises’ critics view the for-profit GSE structure as 

precipitating the enterprises’ financial crises that led to conservatorship, 

market participants and commenters, trade groups representing the 

banking and home construction industries, as well as community and 

housing advocates we contacted, believe that the for-profit GSE structure 

generally remains superior to the alternatives. They assert that continuing 

the enterprises as for-profit GSEs would help ensure that they would 

remain responsive to market developments, continue to produce 

innovations in mortgage finance, and be less bureaucratic than a 

government agency or corporation. But, they also generally advocate 

additional regulations and ownership structures to help offset the financial 

risks inherent in the for-profit GSE structure. 

While this option generally envisions that the enterprises would focus on 

issuing MBS, as is the case with proposals to establish government 

corporations or agencies, several proponents believe they should be 

permitted to maintain a mortgage portfolio to meet certain key 

responsibilities. For example, home construction, small bank, and 

community and housing advocates noted that the enterprises may need to 

maintain portfolios to support multifamily and rural housing finance. 

 

45Robert E. Litan and Martin N. Baily, “Fixing Finance: A Roadmap for Reform,” Initiative 

on Business and Public Policy, Brookings Institution, Washington, D.C., February 17, 2009. 

Page 31 GAO-09-782 Fannie Mae and Freddie Mac
 

Representatives from the home building industry said that the enterprises 

generally have held the majority of their affordable multifamily mortgage 

assets in their portfolios. Fannie Mae officials also said that issuing MBS 

collateralized by multifamily mortgages can be difficult compared with 

issuing MBS collateralized by single-family properties for several reasons.46

A variation of this option involves breaking up the enterprises into 

multiple GSEs. For example, the Congressional Research Service (CRS) 

has stated that the enterprises could be converted into 10 or so GSEs, 

which could mitigate safety and soundness risks.47 That is, rather than 

having the failure of two large GSEs threaten financial stability, the failure 

of a smaller GSE likely would have a more limited impact on the financial 

system. CRS also has stated that creating multiple GSEs could enhance 

competition and benefit homebuyers. 

A potential regulatory action to limit the risks associated with 

reconstituting the enterprises as GSEs would be to establish executive 

compensation limits as deemed appropriate. As discussed previously, 

OFHEO investigative reports in 2003 and 2004 concluded that the 

enterprises manipulated their financial statements in part to help ensure 

that senior executives would receive bonuses. In June 2009, FHFA 

 

46The financing of multifamily projects may not be as amenable to securitization, or the 

issuance of MBS, than single-family mortgages for several reasons, according to Fannie 

Mae. For example, Fannie Mae said that many multifamily loans are securitized into singlepool loans providing less diversification for investors. Moreover, repayment of loans 

secured by multifamily loans typically depends upon the successful operation of the related 

properties rather than the existence of independent income and assets of the borrowers. 

Multifamily loans are typically underwritten and structured individually and may have 

flexible features that give the borrower the ability to add, release, or substitute the 

property securing the loan under certain conditions. The underlying property types vary 

and may include conventional market-rate apartments, affordable housing, seniors housing, 

student housing, manufactured housing communities, and cooperative housing. Further, 

Fannie Mae said multifamily loans are typically structured with 10-year loan terms, but may 

be of varying lengths, some of which appeal to investors more than others. Most 

multifamily loans have prepayment provisions that require the borrower to pay a fee if the 

loan is voluntarily repaid prior to maturity. Prepayment provisions appeal to investors; 

however, loans with variances from the standard provisions are not as liquid because they 

provide less predictability and are more difficult for MBS investors to model. 

47CRS, Fannie Mae’s and Freddie Mac’s Financial Problems, RL-34661 (Washington, D.C.:, 

May 20, 2009). 

Page 32 GAO-09-782 Fannie Mae and Freddie Mac
 

published proposed rules to implement sections of HERA that give FHFA 

authority over executive compensation at the enterprises.48

It has also been suggested that the enterprises be converted from publicly 

traded companies into cooperatives owned by lenders similar to the 

FHLBank structure. For example, one commenter suggested that, by 

having lenders assume some of the risks associated with the enterprises’ 

activities, mortgage underwriting standards could be enhanced. A 

mortgage lending group stated in a recent analysis of options to revise the 

secondary mortgage markets that, under a cooperative structure for 

enterprises, lenders would need to post as collateral a portion of their 

loan-sale proceeds to cover some initial level of potential losses.49 This 

collateral would be refundable to the lenders as loans age and that rights 

to the collateral could be sold to third parties. The trade group also noted 

that while the cooperatives would determine pricing, credit standards, and 

eligibility requirements, they still would need to be subject to safety and 

soundness oversight by the federal government. However, representatives 

from a trade group that represents smaller banks said that it might be 

difficult to convince such banks to participate in a cooperative. They said 

that many smaller banks suffered substantial losses on the preferred stock 

they held in Fannie Mae and Freddie Mac before their conservatorships 

and would be very reluctant to make such investments in the future. 

It also has been suggested that the reconstituted enterprises be subject to 

public utility-type regulation.50 Traditionally, such regulation has been 

used at the federal and state level to oversee and control the finan

performance of monopolies or near monopolies, such as electric, 

telephone, and gas companies. To help prevent disadvantages to 

ratepayers, federal and state governments traditionally have imposed 

limits on such public utilities’ rate of return and required that their rate 

structures be fair and equitable. It has been suggested that the enterprises’ 

historically dominant positions in the mortgage markets, and their cost 

cial 

 

4874 Fed. Reg. 26989 (June 5, 2009). The proposed rules would provide for FHFA’s 

imposition of limits on executive compensation and prior approval of termination benefits. 

They would supersede the OFHEO compensation regulation, which currently applies. 

49Mortgage Bankers Association, “Key Considerations for the Future of the Secondary 

Mortgage Market and the Government Sponsored Enterprises,” Washington, D.C., January 

2009. 

50This discussion is based on issues raised in the following: Robert S. Seiler, Jr., “Fannie 

Mae and Freddie Mac as Investor-owned Public Utilities,” Journal of Public Budgeting, 

Accounting & Financial Management II, no. 1 (1999). 

Page 33 GAO-09-782 Fannie Mae and Freddie Mac
 

advantages associated with the implied guarantee, among other 

advantages, potentially make them candidates for public utility-type 

regulation. 

Former Treasury Secretary Paulson advocated keeping the enterprises as 

corporations, because of the private sector’s capacity to assess credit risk 

compared with government entities, with substantial government support 

but with a variety of controls on their activities. First, Paulson suggested 

that the corporations purchase mortgages with a credit guarantee backed 

by the federal government and not retain mortgage portfolios. Second, 

Paulson recommended that the corporations be subject to public utilitytype regulation.51 Specifically, he recommended that a public utility-type 

commission be established with the authority to set appropriate targets for 

the enterprises’ rate of return and review and approve underwriting 

decisions and new mortgage products. Paulson also recommended that 

the enterprises pay a fee to help offset the value of their federal support 

and thereby also provide incentives for depository institutions to fund 

mortgages, either as competitors to a newly established government 

structure or as a substitute for government funding. 

Privatization or 

Termination 

Some analysts and financial commenters contend that privatizing, 

significantly reducing, or eliminating the enterprises’ presence in the 

mortgage markets represents the best public policy option.52 Advocates of 

this proposal believe that it would result in mortgage decisions more 

closely aligned with market factors and reduce safety and soundness risks. 

That is, sources of mortgage credit and risk would not be concentrated in 

two large and complex organizations that might take excessive risks 

because of the implied federal guarantee on their financial obligations. 

Instead, mortgage credit and risk would be diversified throughout the 

financial system. Federal Reserve Chairman Ben S. Bernanke has 

suggested that privatized entities may be more innovative and efficient 

than government entities, and operate with less interference from political 

interests.53

 

51Former Treasury Secretary Henry M. Paulson, Jr., speech before the Economic Club of 

Washington, January 8, 2009. 

52Because privatization of the enterprises in effect would terminate their GSE status, we 

are treating termination and privatization of the enterprises as equivalent in this report. 

53Federal Reserve Chairman Ben S. Bernanke, “The Mortgage Meltdown, the Economy, and 

Public Policy” (presented at the University of California at Berkeley/University of 

California at Los Angeles Symposium, Berkeley, California, October 31, 2008). 

Page 34 GAO-09-782 Fannie Mae and Freddie Mac
 

Proposals to privatize, minimize, or eliminate the enterprises’ presence in 

the mortgage markets may involve a transition period to mitigate any 

potential market disruptions and facilitate the development of a new 

mortgage finance system. For example, one proposal would freeze the 

enterprises’ mortgage purchase activities, which would permit banks and 

other lenders to assume a greater role in the financial system.54 Some 

researchers and financial commenters also have suggested that privatesector entities, such as consortiums or cooperatives of large banks, would 

have a financial incentive to assume responsibility for key enterprise 

activities, such as purchasing mortgages and issuing MBS. 

Given the substantial financial assistance that Treasury and the Federal 

Reserve have provided to the enterprises during their conservatorships, it 

may be very difficult to credibly privatize them as largely intact entities. 

That is, the financial markets likely would continue to perceive that the 

federal government would provide substantial financial support to the 

enterprises, if privatized as largely intact entities, in a financial emergency. 

Consequently, such privatized entities may continue to derive financial 

benefits, such as lowered borrowing costs, resulting from the markets’ 

perceptions. In exploring various options for restructuring the enterprises, 

Bernanke has noted that some privatization proposals involve breaking the 

enterprises into smaller units to eliminate the perception of federal 

guarantees. 

Bernanke also has questioned whether fully privatized enterprises would 

be able to issue MBS during highly stressful economic conditions. He 

pointed out that, during the current financial crisis, private-sector 

mortgage lending largely stopped functioning. Bernanke cited a study by 

Federal Reserve economists that advocated the creation of an insurer, 

similar to the Federal Deposit Insurance Corporation, to support mortgage 

finance under the privatization proposal.55 The new agency would offer 

 

54Arnold Kling, “Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer,” Cato 

Institute Briefing Papers, no. 106 (Washington, D.C.: Sept. 8, 2008). For additional 

information on privatization and transition issues, see Peter Wallison, Thomas H. Stanton, 

and Bert Ely, Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: 

Why and How, The AEI Press (Washington, D.C.: 2004); and HUD/Policy Development and 

Research, Studies on Privatizing Fannie Mae and Freddie Mac (Washington, D.C.: 1996). 

55Diana Hancock and Wayne Passmore, “Three Mortgage Innovations for Enhancing the 

American Mortgage Market and Promoting Financial Stability” (The University of 

California at Berkeley/University of California Los Angeles Symposium, Berkeley, 

California, October 31, 2008). 

Page 35 GAO-09-782 Fannie Mae and Freddie Mac
 

premium-supported, government-backed insurance for any form of bond 

financing used to provide funding to mortgage markets. 

Bernanke and Paulson also have discussed using covered bonds as a 

potential means to enhance private-sector mortgage finance in the United 

States. According to Bernanke, covered bonds are debt obligations issued 

by financial institutions and secured by a pool of high-quality mortgages or 

other assets. Bernanke stated that covered bonds are the primary source 

of mortgage funding for European banks, with about $3 trillion 

outstanding. However, Bernanke concluded that there are a number of 

challenges to implementing a viable covered bond market in the United 

States. For example, as a source of financing, he said covered bonds 

generally are not competitive with financing provided by the FHLBanks or 

the enterprises, which have lower financing costs due to their association 

with the federal government. 

Each of the options to revise the enterprises’ structures involves important 

trade-offs in terms of their capacity to achieve key housing mission and 

safety and soundness objectives (see table 5). This section examines the 

three options in terms of their ability to (1) provide ongoing liquidity and 

support to mortgage markets, (2) support housing opportunities for 

targeted groups, and (3) ensure safe and sound operations. Furthermore, it 

identifies potential regulatory and oversight structures that might help 

ensure that the implementation of any of the options achieves their 

intended housing mission and safety and soundness objectives. 

A Framework for 

Identifying and 

Analyzing the Tradeoffs Associated with 

Options to Revise the 

Enterprises’ 

Structures, and 

Oversight Structures 

That Might Help 

Ensure Their 

Effective 

Implementation 

Page 36 GAO-09-782 Fannie Mae and Freddie Mac
 

Table 5: Trade-offs Associated with Enterprise Reform Options as They Relate to Long-Established Enterprise Objectives and 

Potential Oversight Structures 

Proposed 

Reform Option 

Provide liquidity and 

support to mortgage 

markets including in bad 

economic times 

Support housing 

opportunities for 

targeted groups 

Ensure safe and sound 

operations 

Possible elements of 

regulatory and oversight 

structure 

Government 

corporation or 

agency 

A government entity, with 

access to Treasury-issued 

debt to fund its operations, 

may be in a better position to 

provide liquidity to the 

mortgage market during 

normal economic periods 

and when capital markets 

are impaired. However, 

because in some cases 

investor demand for its MBS 

may be limited in times of 

financial stress a 

government entity that does 

not have a retained portfolio 

may face challenges 

supporting mortgage 

markets during such periods. 

Treasury or the Federal 

Reserve may have to 

purchase mortgage assets 

under such circumstances 

as has been the case during 

the current disruption in 

mortgage credit markets. 

A government entity most 

likely would be expected to 

pursue housing 

opportunity programs for 

targeted groups due to its 

public status. However, if 

the government entity 

does not have a retained 

mortgage portfolio, it may 

face certain challenges in 

managing a housing goal 

program since some types 

of affordable loans, like 

multifamily loans, often are 

held in portfolio. As 

alternatives, fees could be 

assessed on the 

government entity’s 

activities to support 

housing opportunities for 

targeted groups or FHA’s 

mortgage insurance 

programs could be 

expanded. 

This model may represent 

less risk than traditionally 

has been the case with the 

enterprises’ GSE structure 

and because MBS 

issuance is less 

complicated and risky than 

managing a retained 

mortgage portfolio. 

However, this business 

activity still would be more 

complicated than Ginnie 

Mae’s activities and could 

result in substantial 

taxpayer losses if 

mismanaged. 

Furthermore, a 

government corporation 

could face greater 

challenges than privatesector entities in obtaining 

the human and 

technological resources 

necessary to manage 

complex processes or lack 

the operational flexibility to 

do so. 

Key elements for 

consideration include: 

(1) certain operational 

flexibilities to obtain 

appropriate staff and 

information technology to 

carry out responsibilities, 

(2) risk-sharing 

agreements with private 

lenders or mortgage 

insurers, (3) appropriate 

disclosures in the federal 

budget of risks and 

liabilities to ensure 

financial transparency, and 

(4) robust congressional 

oversight of operations. 

Page 37 GAO-09-782 Fannie Mae and Freddie Mac
 

Proposed 

Reform Option 

Provide liquidity and 

support to mortgage 

markets including in bad 

economic times 

Support housing 

opportunities for 

targeted groups 

Ensure safe and sound 

operations 

Possible elements of 

regulatory and oversight 

structure 

Reconstituted 

GSEs 

The enterprises as 

reconstituted GSEs may 

provide liquidity and other 

benefits to mortgage finance 

during normal economic 

times as they did for many 

years. However, their ability 

to provide such support 

during stressful economic 

periods is questionable 

given current experience. 

Furthermore, with 

significantly reduced or 

eliminated retained 

mortgage portfolios, 

reconstituted GSEs’ capacity 

to provide support to 

mortgage markets during 

periods of economic distress 

may also be limited. 

Reconstituted GSEs, with 

their responsibility to 

maximize profits for their 

shareholders, might find it 

difficult to support some 

public policy housing 

initiatives. Moreover, 

without a retained 

mortgage portfolio, the 

reconstituted GSEs may 

face challenges in 

implementing a numeric 

housing goal purchase 

program. This challenge 

could be addressed by 

permitting a reconstituted 

GSE to maintain a 

relatively small portfolio or 

by supporting housing 

opportunities for targeted 

groups through 

assessments on its 

activities. 

The current financial crisis 

highlights some of the 

problems with the 

traditional GSE structure, 

including the incentive for 

the enterprises to increase 

leverage and maximize the 

size of their portfolios, 

creating risks to financial 

stability. Reconstituting the 

GSEs would combine 

private ownership with an 

explicit government 

guarantee, reestablish and 

perhaps strengthen these 

incentive problems, which 

again could lead to even 

greater moral hazard and 

safety and soundness 

concerns, as well as 

potentially increased 

systemic risks. Proposals 

to regulate GSEs like 

public utilities could, in 

principle, constrain 

excessive risk-taking, but 

the applicability of the 

public utility model of 

regulation to the 

enterprises has not been 

established. Moreover, 

FHFA has not been tested 

as an independent safety 

and soundness and 

housing mission regulator 

as the agency generally 

has acted as a conservator 

since its establishment in 

July 2008. 

Key elements for 

consideration include: 

(1) reducing or perhaps 

eliminating retained 

mortgage portfolios as 

deemed appropriate 

depending on prioritization 

of numeric housing and 

safety and soundness 

objectives, (2) establishing 

capital standards that are 

commensurate with 

relevant risks, (3) 

developing additional 

regulations such as 

executive compensation 

limits or perhaps including 

public utility regulation, 

(4) requiring appropriate 

financial disclosures in the 

federal budget to enhance 

transparency, and 

(5) ensuring strong 

congressional oversight of 

the enterprises’ and 

FHFA’s performance. 

Page 38 GAO-09-782 Fannie Mae and Freddie Mac
 

Proposed 

Reform Option 

Provide liquidity and 

support to mortgage 

markets including in bad 

economic times 

Support housing 

opportunities for 

targeted groups 

Ensure safe and sound 

operations 

Possible elements of 

regulatory and oversight 

structure 

Privatization or 

termination 

Privatizing or terminating the 

enterprises would eliminate 

many problems with the 

current GSE model, 

including the conflict 

between public policy and 

private shareholders. If key 

enterprise activities such as 

mortgage purchases and 

MBS issuances are provided 

by other financial institutions, 

liquid mortgage markets 

could be reestablished in 

normal economic times. 

There is significant reason to 

question the capacity of 

private banks to support 

mortgage markets in times 

of financial distress without 

government support, given 

the failure or near failure of 

key financial institutions and 

the absence of private-label 

securitization during the 

current financial crisis. A 

federal mortgage insurer 

could help such lenders to 

provide liquidity and other 

benefits in times of financial 

stress. 

Privatization or termination 

would remove the 

traditional legislative basis, 

government sponsorship, 

for the enterprises to 

implement programs to 

serve the mortgage credit 

needs of targeted groups. 

However, the basis for 

such programs may 

remain if a government 

insurer for mortgage debt 

is established and the 

federal government 

guarantees its financial 

obligations. Furthermore, 

programs might be justified 

by Congress on the 

grounds that large lenders 

that assume responsibility 

for key enterprise activities 

or purchase their assets 

are viewed as “too big to 

fail” and/or benefit from 

implied federal guarantees 

on their financial 

obligations. 

The termination of the 

enterprises as GSEs and 

reliance on private-sector 

firms would leave market 

discipline and regulators of 

financial institutions with 

responsibility for promoting 

safety and soundness. 

However, moral hazard 

concerns would still remain 

if some mortgage lenders 

were deemed “too big to 

fail.” These concerns may 

be heightened because 

the current fragmented 

financial regulatory system 

already faces challenges 

in overseeing such 

organizations. Additionally, 

safety and soundness 

concerns may remain if a 

federal entity is 

established to insure 

mortgage debt and does 

not charge appropriate 

premiums to offset the 

risks that it incurs. FHA 

and the FHLBank System 

may become more 

prominent if the 

enterprises were privatized 

or terminated. 

The need for a new 

financial regulatory 

system, due to concerns 

about the current 

fragmented system, may 

be heightened to the 

extent that terminating or 

privatizing the enterprises 

results in larger and more 

complex financial 

institutions. In considering 

a new system, Congress 

should consider 

establishing clear 

regulatory goals, a 

systemwide risk focus, and 

the need to mitigate 

taxpayer risks. If a new 

federal mortgage insurer is 

established, there should 

be an appropriate 

oversight structure for such 

an entity. This structure 

might include appropriate 

regulations and capital 

standards, the disclosure 

of risks and liabilities in the 

federal budget, and 

congregational oversight. 

Source: GAO analysis of structural reform options. 

Potential Trade-offs 

Associated with 

Establishing a Government 

Corporation or Agency 

With many of its activities funded directly through Treasury debt 

issuances, a government corporation or agency (a government entity) 

could help provide liquidity to mortgage markets during good economic 

times through the purchase of large volumes of mortgages that meet 

specified underwriting criteria and issue MBS collateralized by such 

mortgages. In the process, a government entity also could help ensure 

standardization in the mortgage underwriting process. Additionally, a 

government entity might have a structural advantage over private 

entities—such as reconstituted GSEs, banks, or other private lenders—in 

providing liquidity to mortgage markets during periods of economic stress. 

That is, a government entity may be able to continue to fund its activities 

through government debt issuances. In contrast, for-profit entities face 

Page 39 GAO-09-782 Fannie Mae and Freddie Mac
 

potential conflicts in supporting mortgage finance during stressful 

economic periods because they also must be concerned about maintaining 

shareholder value, which may mean substantially reducing their activities 

or withdrawing from markets entirely as has occurred during the recent 

economic downturn. However, to the extent that a retained mortgage 

portfolio may be necessary to help respond to a financial crisis, a 

government entity without such a portfolio may face challenges in 

supporting mortgage finance, particularly if investor demand for its MBS 

were to become limited. Other federal entities, such as Treasury and the 

Federal Reserve, may have to step in to purchase and hold mortgage 

assets on their balance sheets (as has been the case during the current 

financial crisis) if such a situation existed. 

The absence of a retained mortgage portfolio for a government entity also 

could affect the traditional conventional, conforming mortgage market. 

Over the past 10 years, the enterprises, as discussed earlier, have 

maintained large mortgage portfolios. If this option is no longer available, 

lenders may find it more challenging to find buyers for these mortgages in 

the secondary market. It is not clear the extent to which a government 

entity could maintain the same general level of mortgage purchases as the 

enterprises if it were confined to assembling all such mortgages into MBS. 

A government entity most likely would be expected to support 

homeownership opportunities for targeted groups given its status as a 

public organization. This option also would resolve any structural conflicts 

that the enterprises faced over the years as for-profit, publicly-traded, 

shareholder-owned corporations in supporting homeownership 

opportunities for targeted groups. A government corporation or agency 

would be a public entity without the responsibility to maximize 

shareholder value. However, if a government entity were not permitted to 

have a retained mortgage portfolio, as some researchers have proposed, it 

likely would face challenges in implementing a numeric mortgage 

purchase program similar to that of the enterprises. As discussed 

previously, the enterprises tended to hold a significant portion of 

multifamily mortgages that were purchased pursuant to the numeric 

mortgage purchase programs in their retained portfolios. That is because it 

may be difficult to convert multifamily mortgage assets into MBS 

compared with single-family mortgages. There might be several different 

ways to address this challenge. For example, fees or assessments could be 

imposed on the activities of the government entity, and such revenues 

could be used to directly support the construction of affordable housing or 

provide down payment assistance to targeted homebuyers. Under HERA, 

the enterprises were to pay assessments to fund a Housing Trust Fund for 

Potential Capacity to Facilitate 

the Flow of Mortgage Credit to 

Targeted Groups 

Page 40 GAO-09-782 Fannie Mae and Freddie Mac
 

the purposes of providing grants to states to increase and preserve the 

supply of rental housing and increase homeownership for extremely lowand very low-income families, but FHFA has suspended this program due 

to the enterprises’ financial difficulties.56 Alternatively, FHA could be 

expanded to assume responsibility for the enterprises’ ongoing efforts to 

support homeownership opportunities as one researcher has suggested. 

However, as is discussed later, FHA’s current operational capacity to 

manage a large increase in its business may be limited, which could 

increase taxpayer risks. 

In some respects, a government entity that focused its activities on 

purchasing mortgages and issuing MBS might pose lower safety and 

soundness risks than has been the case with the enterprises. For example, 

a government entity would not be motivated by an implied federal 

guarantee to engage in risky business practices to achieve profitability 

targets and thereby maintain shareholder value as was the case with the 

enterprises. Furthermore, if a government entity were not to retain a 

mortgage portfolio, as has been proposed, then it would be less complex 

and potentially less risky than the enterprises’ current structure. As 

already discussed, the enterprises’ large retained portfolios exposed them 

to significant interest-rate risk, and they misapplied accounting rules that 

governed the hedging techniques necessary to manage such risks. 

Potential Safety and Soundness 

Concerns 

Nevertheless, successfully managing a large conventional mortgage 

purchase and MBS issuance business still may be a complex and 

challenging activity for a government entity, and the failure to adequately 

manage the associated risks could result in significant losses that could be 

the direct responsibility of taxpayers. For example, the enterprises’ 

substantial losses in recent years have been credit-related (due to 

mortgage defaults), including substantial losses in their MBS guarantee 

business. This risk may be heightened if a government entity were 

expected to continue purchasing mortgages and issuing MBS during 

stressful economic periods when the potential for losses may be greater 

 

56HERA amended the Federal Housing Enterprises Financial Safety and Soundness Act of 

1992 to require Fannie Mae and Freddie Mac to set aside an amount each fiscal year equal 

to 4.2 basis points for each dollar of unpaid principal balance of its total new business 

purchases and transfer 65 percent of the amount to HUD to fund the Housing Trust Fund 

and 35 percent of the amount to the Capital Magnet Fund, a trust fund in Treasury’s 

Community Development Financial Institutions Fund. (Pub. L. No. 110-289 § 1131). On June 

3, 2009, the FHFA Director stated that FHFA suspended enterprise contributions to the 

Housing Trust Fund in light of enterprise losses and their draws on Treasury’s Senior 

Preferred Stock Purchase facility. 

Page 41 GAO-09-782 Fannie Mae and Freddie Mac
 

than would otherwise be the case. As discussed previously, Ginnie Mae 

provides only a limited model for the establishment of such a government 

corporation or agency. Ginnie Mae guarantees the timely payment of 

principal and interest on MBS collateralized by mortgages, but federal 

agencies insure or guarantee such mortgages and lenders issue the MBS. 

Furthermore, Ginnie Mae is not responsible for establishing credit 

underwriting standards or monitoring lenders’ adherence to them; rather, 

these functions are carried out by FHA, VA, PIH, and USDA/RD. In 

contrast, a government entity that issued MBS collateralized by 

conforming mortgages as is the case with the enterprises would be 

responsible for managing credit risk, including setting appropriate 

guarantee fees to offset such risk.57

As described in our previous work on FHA, government entities may lack 

the financial resources necessary to attract the highly skilled employees 

needed to manage complex business activities or the information 

technology necessary to help do so.58 Furthermore, government entities 

sometimes are subject to laws and regulations that may limit their capacity 

to respond to market developments. In a range of recent reports, HUD’s 

Office of Inspector General expressed concerns about whether FHA had 

the staffing expertise and information technology needed to manage the 

rapid increase in its mortgage insurance business since 2008.59

To help ensure that a government entity could achieve its housing mission 

objectives while operating in a safe and sound manner, an appropriate 

oversight framework would need to be established. While such a 

framework would need to clearly define the roles and objectives of a 

government entity in the mortgage finance system, it would need to afford 

the entity sufficient flexibility to acquire adequate resources and manage 

its activities to fulfill its mission. The establishment of risk-sharing 

arrangements with the private sector, such as requirements that lenders 

Oversight Structure That Could 

Help Ensure the Effective 

Implementation of a 

Government Corporation or 

Agency 

 

57See GAO, Housing Finance: Ginnie Mae Is Meeting Its Mission but Faces Challenges in 

a Changing Marketplace, GAO-06-9 (Washington, D.C.: Oct. 31, 2005). 

58See GAO, Federal Housing Administration: Modernization Proposals Would Have 

Program and Budget Implications and Require Continued Improvement in Risk 

Management, GAO-07-708 (Washington, D.C.: June 29, 2007) and GAO, Information 

Technology: HUD Needs to Strengthen Its Capacity to Manage and Modernize its IT 

Environment, GAO-09-675 (Washington, D.C.: July 31, 2009). 

59House Committee on Financial Services, testimony of James A. Heist, Assistant Inspector 

General for Audit, U.S. Department of Housing and Urban Development, 111th Cong., 2nd 

sess., January 9, 2009. 

Page 42 GAO-09-782 Fannie Mae and Freddie Mac
 

that sell mortgages to the government entity retain some exposure to 

potential credit losses or that private mortgage insurance is obtained on 

such mortgages, could help mitigate the risk of potential losses. Such a 

government entity could be expected to reflect its risk and liabilities in the 

federal budget to help ensure financial transparency of its operations. 

Finally, robust congressional oversight of any such entity would be needed 

to help ensure that the entity was fulfilling its objectives. 

Potential Trade-offs 

Associated with 

Reestablishing the 

Enterprises as For-profit 

GSEs 

When mortgage credit markets stabilize, the enterprises as reconstituted 

GSEs might be expected to perform functions that they have performed 

for many years, such as purchasing conventional mortgages, issuing MBS, 

and perhaps managing a relatively small retained mortgage portfolio under 

some proposals. Through such activities, the enterprises might be 

expected to provide liquidity to mortgage markets during good economic 

periods, as well as provide standardization to the mortgage underwriting 

process and certain technical and procedural innovations. However, as 

for-profit corporations, significant concerns remain about how well the 

reconstituted enterprises would be able to support financial markets 

during stressful economic periods without substantial financial support 

from Treasury or the Federal Reserve. 

Moreover, the reconstituted GSEs, like government corporations or 

agencies, might face challenges in their ability to support mortgage finance 

if their mortgage portfolios were substantially downsized or eliminated as 

envisioned under some proposals. For example, with substantially 

downsized or eliminated mortgage portfolios, the reconstituted GSEs 

might further limit their capacity to respond to financial crisis, in which 

case, the likelihood that Treasury or the Federal Reserve would need to 

respond by buying and holding mortgage assets on their balance sheets 

would be increased. In addition, substantially downsizing or eliminating 

the reconstituted GSEs mortgage portfolios could limit lenders’ ability to 

sell conventional, conforming mortgages on the secondary market. 

Permitting the enterprises as reconstituted GSEs to maintain mortgage 

portfolios, albeit at lower levels than prior to their conservatorships, could 

help address these potential concerns. 

Similarly, decisions about the size of the reconstituted GSEs’ mortgage 

portfolios would likely affect their capacity to support mortgage purchase 

programs to facilitate the flow of mortgage credit to targeted groups. If the 

reconstituted GSEs’ mortgage portfolios were substantially decreased or 

eliminated, then their ability to purchase and hold multifamily mortgages 

that serve targeted groups might be limited. On the other hand, permitting 

Potential Capacity to Facilitate 

the Flow of Mortgage Credit 

Serving Targeted Groups 

Page 43 GAO-09-782 Fannie Mae and Freddie Mac
 

the reconstituted GSEs to maintain a mortgage portfolio of an appropriate 

size could mitigate this potential concern. Another consideration 

associated with establishing the enterprises as for-profit GSEs is the 

potential conflict with a requirement to facilitate the flow of mortgage 

credit serving targeted groups. Alternatives to establishing a numeric 

mortgage purchase program to support homeownership opportunities for 

targeted groups could include assessing fees on the reconstituted GSEs to 

directly fund such programs, expanding FHA’s mortgage insurance 

programs, or providing direct down-payment assistance to targeted 

borrowers.60

Continuing the enterprises as GSEs could present significant safety and 

soundness concerns as well as systemic risks to the financial system. In 

particular, the potential that the enterprises would enjoy explicit federal 

guarantees of their financial obligations, rather than the implied 

guarantees of the past, might serve as incentives for them to engage in 

risky business practices to meet profitability objectives. Treasury 

guarantees on their financial obligations also might provide the enterprises 

with significant advantages over potential competitors. Furthermore, 

FHFA’s capacity to monitor and control such potentially risky business 

practices has not been tested. Since its establishment in July 2008, FHFA 

has acted both as the enterprises’ conservator and safety and soundness 

and housing mission regulator. Under the conservatorship, FHFA has 

significant control over the enterprises’ operations. For example, the 

FHFA Director has appointed the enterprises’ chief executive officers and 

boards of directors and can remove them as well. But FHFA officials said 

that agency staff also have been monitoring the enterprises’ business risks. 

It remains to be seen how effectively FHFA would carry out its oversight 

responsibilities solely as an independent regulator if the enterprises were 

reconstituted as for-profit GSEs. 

Potential Safety and Soundness 

Concerns 

While converting the enterprises into multiple GSEs could mitigate safety 

and soundness and systemic risk concerns by minimizing concentration 

risks, it also likely would involve trade-offs. For example, multiple GSEs, 

due to their potentially small size, may not be able to achieve economies of 

scale and generate certain efficiencies for mortgage markets as has been 

the case with Fannie Mae and Freddie Mac. As discussed earlier, the 

 

60For example, the FHLBanks manage the Affordable Housing Program, which assists in 

the development of affordable housing for low- and moderate-income households, through 

contributions of 10 percent of their previous year’s net earnings. 

Page 44 GAO-09-782 Fannie Mae and Freddie Mac
 

enterprises, through their secondary mortgage market activities, have been 

credited with facilitating the development of a liquid national mortgage 

market and establishing standardized underwriting practices for mortgage 

lending. 

Alternatively, converting the enterprises from their current structure as 

publicly owned corporations into cooperatives owned by the lenders that 

sell mortgages to them may offer certain advantages in terms of their 

safety and soundness. For example, as the owners of the enterprises, 

lenders may have financial incentives to ensure that the mortgages that 

they sell to the enterprises are properly underwritten so as to minimize 

potential losses that would affect the value of their investments. As 

discussed previously, Freddie Mac, as a cooperative, generally managed to 

avoid the financial problems that Fannie Mae, which was a publicly owned 

corporation, faced during the early 1980s. However, it should also be 

noted that the cooperative structure may also have limitations. For 

example, some FHLBanks, which are members of the cooperative 

FHLBank System, have faced losses recently due to their investments in 

private-label mortgage assets. 

While the public utility model of regulation has been proposed as a means 

to help mitigate the risks associated with reestablishing the enterprises as 

GSEs, this proposal involves complexities and trade-offs. For example, it 

is not clear that the public utility model is an appropriate regulatory 

structure because, unlike natural monopolies such as electric utilities, the 

enterprises have faced significant competition from other providers of 

mortgage credit over the years. For example, as discussed previously, the 

enterprises’ market share declined substantially from 2004 through 2006 

due to the rapid growth of the private-label MBS market. Public utility-type 

regulation also has been criticized as inefficient and many states have 

sought to deregulate their electric and other markets. Furthermore, these 

proposals may have offsetting effects on the GSEs’ financial viability. For 

example, former Treasury Secretary Paulson’s proposal would subject 

their credit decisions and rate of return to preapproval by a public utilitytype board, and impose fees on them to offset any benefits derived from 

government sponsorship of their activities. It is not clear if an entity 

subject to such business activity restrictions, regulations, and fees, even 

with Treasury guarantees on its financial obligations, would be able to 

raise sufficient capital from investors or purchase mortgages on terms that 

mortgage lenders would find cost-effective. 

Page 45 GAO-09-782 Fannie Mae and Freddie Mac
 

A range of potential options exist for developing an appropriate regulatory 

structure to help ensure that any reconstituted GSEs would operate in a 

safe and sound manner while achieving housing mission objectives. For 

example, if maintaining safety and soundness is viewed as a priority over a 

numeric housing goal program, then eliminating retained mortgage 

portfolios may be viewed as appropriate. Alternatively, the retained 

mortgage portfolios could be substantially smaller and restricted to certain 

types of assets to help ensure safety and soundness while promoting 

housing mission achievement. Other steps that may be deemed 

appropriate could include establishing capital standards for the 

enterprises commensurate with their risk, additional restrictions on their 

activities, executive compensation limits, public utility regulation, 

appropriate financial disclosures of risks and liabilities in the federal 

budget, and strong congressional oversight of the enterprises’ and FHFA’s 

performance. 

Potential Oversight Structure 

That Could Help Ensure the 

Effective Implementation of 

Reconstituted GSEs 

Potential Trade-offs 

Associated with Privatizing 

or Terminating the 

Enterprises 

As with the preceding two sets of options, proposals that involve the 

privatization or ultimate termination of the enterprises involve a number 

of trade-offs. For example, if a consortium of large banks assumed 

responsibility for key activities (such as mortgage purchases and MBS 

issuances) of the enterprises, during good economic times it might be able 

to provide liquidity to the mortgage finance system, help ensure 

consistency through uniform underwriting standards, and potentially 

promote innovation in mortgage finance. However, the ability of private 

lenders to provide support to mortgage markets during stressful economic 

periods is questionable. As discussed previously, many private-sector 

lenders have failed or withdrawn from mortgage markets during the 

current economic downturn. The establishment of a federal mortgage debt 

insurer, as has been proposed, may facilitate private lenders’ capacity to 

support mortgage markets during stressful periods. 

Privatizing or terminating the enterprises also could affect the structure of 

mortgage lending that has evolved over the years. For example, lenders 

might be less willing to originate 30-year, fixed-rate mortgages, due to the 

associated interest-rate risk of holding them in portfolio, if any ensuing 

private-sector secondary market alternatives (such as a consortium of 

private-sector lenders) were less willing to purchase such mortgages than 

the enterprises had been. Additionally, privatization or termination could 

result in a relative increase in mortgage interest rates, because privatePage 46 GAO-09-782 Fannie Mae and Freddie Mac
 

sector lenders might not have the funding advantages that the enterprises 

derived from their federal sponsorship over the years.61

This option also could eliminate the traditional legislative basis for 

requiring that they facilitate the flow of mortgage credit serving targeted 

groups, particularly through the numeric mortgage purchase program. 

That is, the enterprises currently have a responsibility to help meet the 

mortgage credit needs of all potential borrowers due to the financial 

benefits associated with federal sponsorship, which would not be the case 

for private-sector lenders under the termination and privatization 

proposals. However, if new federal organizations were established, such as 

a mortgage insurer, to facilitate the transition to a mortgage finance 

system in which the enterprises no longer exist, then they could be 

required to assume responsibility for facilitating the flow of mortgage 

credit to targeted groups. For example, the Community Reinvestment 

Act’s requirements that insured depositories, such as banks and thrifts, 

serve the credit needs of the communities in which they operate could be 

extended to nondepository lenders, such as independent mortgage 

lenders, which would obtain mortgage insurance from a new federal 

mortgage insurer. 

Potential Capacity to Facilitate 

the Flow of Mortgage Credit to 

Targeted Groups 

Moreover, if a consortium of large lenders or other financial institutions 

assumed responsibility for key enterprise functions (like MBS issuances), 

or purchased a substantial share of their assets, then requirements that 

such institutions serve the credit needs of targeted groups also might be 

justified. For example, such institutions could be perceived as benefiting 

from implied federal guarantees on their debt or being too big to fail. We 

note that Treasury and the Federal Reserve have provided direct financial 

assistance to a range of financial and other institutions during the current 

financial crisis, which may create the perception in financial markets that 

the federal government is more likely to intervene in a future crisis. 

The extent to which privatizing or terminating the enterprises mitigates 

current safety and soundness and financial stability risks is difficult to 

determine. Under one scenario, such risks would be mitigated because 

large and complex enterprises, which might engage in risky business 

practices due to the implied federal guarantee on their financial 

obligations, would not exist. Instead, private lenders would be subject to 

market discipline and consequently would be more likely to make credit 

Potential Safety and Soundness 

Concerns 

 

61GAO/GGD-96-120. 

Page 47 GAO-09-782 Fannie Mae and Freddie Mac
 

decisions largely on the basis of credit risk and other market factors. 

However, this scenario would be complicated if a federal entity were 

established to insure mortgage debt. If the federal mortgage insurer did 

not set appropriate premiums to reflect the risks of its activities, then 

lenders might have incentives to engage in riskier business practices than 

otherwise would be the case. In similar situations, such as the National 

Flood Insurance Program, federal agencies have faced challenges in 

establishing appropriate premiums to compensate for the risks that they 

underwrite. If large private-sector financial institutions assumed 

responsibility for key enterprise activities or purchased a significant 

portion of their assets, the perception could arise that the failure of such 

an institution would involve unacceptable systemic financial risks. 

Therefore, markets’ perceptions that the federal government would 

provide financial assistance to such financial institutions could undermine 

market discipline. 

Moreover, limitations in the structure of the current U.S. financial 

regulatory system could heighten concerns about the potential safety and 

soundness risks associated with large financial institutions assuming 

responsibility for key enterprise financial activities or becoming larger due 

to the purchase of their assets. In a recent report, we stated that the 

current fragmented regulatory system for banks, securities firms, 

insurance companies, and other providers evolved over many years and 

often in response to financial crises.62 We stated that the large and 

complex financial conglomerates that have emerged in the past decades 

often operate globally across financial sectors and that federal regulators 

have faced significant challenges in monitoring and overseeing their 

operations. For example, the report noted that a Federal Reserve official 

recently acknowledged that, under the current structure, which consists of 

multiple supervisory agencies, challenges can arise in assessing risk 

profiles of these institutions, particularly because of the growth in the use 

of sophisticated financial products that can generate risks across various 

legal entities. 

Privatizing or terminating the enterprises also could increase the relative 

prominence of other federal programs designed to promote 

homeownership and housing opportunities, which also may have safety 

 

62GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to 

Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216 (Washington, 

D.C.: Jan. 8, 2009). 

Page 48 GAO-09-782 Fannie Mae and Freddie Mac
 

and soundness implications. Due to the diminished presence of the 

enterprises in mortgage finance under these proposals, market 

participants, such as banks and thrifts, increasingly might turn to the 

FHLBank System as a source of funding for their operations and lending 

activities. The FHLBank System could enjoy an advantage over other 

potential competitors in filling the void left by the enterprises because, as 

a GSE benefiting from an implied guarantee, it may be able to issue debt to 

fund its activities at relatively advantageous rates. However, some 

FHLBanks have recently reported losses due to investments in privatelabel MBS. Similarly, FHA’s mortgage insurance programs might increase 

if the enterprises’ diminished role limits the availability of mortgage credit 

in the conforming market. 

The development of an appropriate regulatory structure to help ensure 

housing mission achievement and safety and soundness, as deemed 

appropriate, would depend on the outcome of a range of contingencies 

associated with options to privatize or terminate the enterprises. For 

example, should Congress choose to establish a new public entity to 

insure all mortgage debt, with the federal government guaranteeing the 

insurance, then a new regulatory and oversight structure would be needed 

to oversee the operations of such an insurer. As with other options to 

reform the enterprises’ structures, an appropriate structure for such an 

entity might involve a regulatory agency with authorities to carry out its 

activities and capital standards that reflect the risk of the entity’s 

activities, disclosures of risks and liabilities in the federal budget to help 

ensure financial transparency, and robust congressional oversight. 

Furthermore, revisions may be necessary to help ensure that the U.S. 

financial regulatory system can better oversee the risks associated with 

large and complex financial institutions, which may assume responsibility 

for key enterprise activities or become larger over time through the 

acquisition of their assets. Our recent report identified a series of 

principles, such as establishing clear regulatory goals, ensuring a focus on 

systemwide financial risks, and mitigating taxpayer risks, for Congress to 

consider in deciding on the most appropriate regulatory system.63

Potential Oversight Structure 

That Could Help Ensure the 

Effective Implementation of 

Terminating or Privatizing the 

Enterprises 

 

63GAO-09-216. 

Page 49 GAO-09-782 Fannie Mae and Freddie Mac
 

Since the beginning of the FHFA conservatorships, the enterprises have 

been tasked to initiate a range of programs, such as assisting homeowners 

struggling to make their mortgage payments to refinance or modify their 

mortgage terms, to respond to the current crisis in housing markets. These 

initiatives could benefit housing markets and, in so doing, potentially 

benefit the enterprises’ financial condition. However, the initiatives also 

may involve additional risks and costs for the enterprises, which could 

increase the costs and challenges associated with transitioning to new 

structures over time. Similarly, certain provisions in the Treasury 

agreements with the enterprises may affect their long-term financial 

viability and complicate a transition to a new structure. Finally, any 

transition to a new structure would need to take into consideration the 

enterprises’ dominant position within housing finance, even during the 

conservatorships, and, therefore, should be carefully implemented—

perhaps in phases—to help ensure its success. 

The following points summarize several of the initiatives that the 

enterprises have undertaken in response to the substantial downturn in 

housing markets: 

Federal Efforts to 

Support Housing 

Markets during the 

Conservatorships and 

Certain Terms of 

Treasury Agreements 

Could Increase the 

Costs and Challenges 

Associated with the 

Transition to New 

Enterprise Structures 

• Under the Home Affordable Refinance Program (HARP), which was 

initiated in March 2009, borrowers that have current payment histories can 

refinance and reduce their monthly mortgage payments at loan-to-value 

ratios of up to 105 percent without obtaining mortgage insurance. On July 

1, 2009, the program was extended to apply to mortgage loans with loanto-value ratios of up to 125 percent. 

• Under the Home Affordable Modification Program (HAMP), certain 

borrowers who are delinquent, or in imminent danger of default, on their 

mortgage payments may have the terms of their existing mortgages 

modified in order to make payments more affordable. Specifically, the 

program allows for interest rate reductions (down to 2 percent), term 

extension (up to 480 months), principal forbearance, and principal 

forgiveness. Under the program, the enterprises will provide up to $25 

billion in incentives to borrowers and servicers for program participation 

and a successful payment history.64

 

64Under HAMP, Treasury will provide up to $50 billion in interest-rate reduction and 

incentives to servicers, mortgage holders/investors, and borrowers for the modification of 

nonenterprise loans. 

Page 50 GAO-09-782 Fannie Mae and Freddie Mac
 

• In November 2008, the enterprises suspended the initiation of foreclosure 

proceedings on mortgages that they held in their portfolios or on which 

they had guaranteed principal and interest payments for MBS investors. 

This initiative subsequently was extended through March 31, 2009. In 

March 2009, the enterprises also suspended foreclosure sales on 

mortgages that may be eligible under HAMP until borrowers’ eligibility for 

HAMP has been verified. 

While these federal initiatives were designed to benefit homebuyers, in 

recent financial filings, both Freddie Mac and Fannie Mae have stated that 

the initiative to offer refinancing and loan modifications to at-risk 

borrowers could have substantial and adverse financial consequences for 

them. For example, Freddie Mac stated that the costs associated with 

large numbers of its servicers and borrowers participating in loanmodification programs may be substantial and could conflict with the 

objective of minimizing the costs associated with the conservatorships.65

Freddie Mac further stated that loss-mitigation programs, such as loan 

modifications, can increase expenses due to the costs associated with 

contacting eligible borrowers and processing loan modifications. 

Additionally, Freddie Mac stated that loan modifications involve 

significant concessions to borrowers who are behind in their mortgage 

payment, and that modified loans may return to delinquent status due to 

the severity of economic conditions affecting such borrowers. Fannie Mae 

also has stated that, while the impact of recent initiatives to assist 

homeowners is difficult to predict, the participation of large numbers of its 

servicers and borrowers could increase the enterprise’s costs 

substantially.66 According to Fannie Mae, the programs could have a 

materially adverse effect on its business, financial condition, and net 

worth. 

However, FHFA officials said that they strongly believe the recent 

initiatives to support the housing markets, on balance, represent the best 

means available for the enterprises to preserve their assets and fulfill their 

housing missions. For example, FHFA officials said that, to the extent that 

their initiatives are successful in stabilizing housing markets, the 

enterprises will be the major beneficiaries as the number of delinquent 

mortgages and foreclosures is reduced. FHFA officials also commented 

 

65Freddie Mac, “Form 10-K: Annual Report for the Fiscal Year Ended December 31, 2008.” 

66Fannie Mae, “Form 10-Q: Quarterly Report for the Quarterly Period Ended September 30, 

2008.” 

Page 51 GAO-09-782 Fannie Mae and Freddie Mac
 

that recent modification programs, such as HAMP, are more likely to be 

successful than modification initiatives dating to 2008, which had high 

redefault rates. FHFA officials said that the more recent loan-modification 

initiatives were more likely to reduce borrowers’ monthly payments. 

According to an FHFA report, the traditional approaches to loan 

modifications (allowing borrowers to bring loans current by reamortizing 

past due payments over the remaining life of the loan) increased monthly 

payments and, therefore, often resulted in high redefault rates.67

Furthermore, FHFA officials stated that recent loan-to-value ratio 

refinance programs only apply to mortgages that the enterprises already 

guarantee, so they already are exposed to the credit risks on these loans. 

FHFA officials said that such refinancings also should lower borrowers’ 

payments and thereby further reduce the enterprises’ existing credit 

exposure. 

While FHFA’s positions are plausible, it is too early to reach any 

conclusion about the effects that the initiatives will have on the 

enterprises’ financial condition and preliminary data raise potential 

concerns. According to a report by the Office of the Comptroller of the 

Currency (OCC) and the Office of Thrift Supervision (OTS), loan 

modifications initiated in 2008 that reduced borrowers’ monthly payments 

by 20 percent or more had significantly lower redefault rates after 1 year 

than modifications that left monthly payments unchanged or higher.68

Specifically, the study found that, of the modifications that involved 

reductions of 20 percent or more, 38 percent were 60 or more days past 

due after 1 year, whereas the rate was nearly 60 percent for modifications 

that left monthly payments unchanged or higher. However, the fact that 

nearly 40 percent of loan modifications that substantially reduced monthly 

payments were already 60 or more days past due after 1 year raises 

concerns about whether the additional costs that enterprises incur in 

administering such programs will be effective. Furthermore, it is also not 

clear whether initiatives to suspend foreclosure proceedings will benefit 

the enterprises’ financial condition. Our previous work has found that, for 

mortgage providers such as Fannie Mae and Freddie Mac, foreclosure 

costs may increase the longer it takes to maintain and sell foreclosed 

 

67Federal Housing Finance Agency, Foreclosure Prevention Report: First Quarter 2009 

(Washington, D.C.: 2009). 

68OCC and OTS, “Mortgage Metrics Report, First Quarter 2009” (Washington, D.C.: April 

2009). 

Page 52 GAO-09-782 Fannie Mae and Freddie Mac
 

properties.69 A potential risk of suspending pending foreclosure sales is 

that many borrowers facing foreclosure will not be able to obtain funds 

necessary to make their mortgage loan payments current.70 As a result of 

delays in foreclosing on such properties, the potential exists that the 

properties will not be maintained or will become vacant, which could 

increase the enterprises’ associated costs. 

Treasury’s agreements with Fannie Mae and Freddie Mac, which specify 

terms under which the department is to provide certain types of financial 

support to them, also may have long-term financial consequences. In 

connection with the agreements, quarterly dividends declared by the 

enterprises are to be paid to holders of the senior preferred stock 

(Treasury). These dividends accrue at 10 percent per year and increase to 

12 percent if, in any quarter, they are not paid in cash. If either enterprise 

cannot pay the required dividends, then Treasury has a claim against the 

assets of the enterprise for the unpaid balance in a liquidation proceeding. 

Available financial data suggest that the enterprises, while in 

conservatorship and over the longer term, will face significant financial 

challenges in paying the required dividends to Treasury. For example, 

Treasury already purchased $50 billion in preferred stock in Freddie Mac, 

which translates into an annual dividend of $5 billion, and CBO estimated 

that the department will invest substantially more in the enterprise’s 

preferred shares in coming quarters (up to the guarantee limit of $200 

billion). Prior to the conservatorship, Freddie Mac’s reported annual net 

income twice came close to or exceeded $5 billion, and the dividends that 

it distributed to shareholders in those years likely were substantially 

lower. In addition, the agreements require that, beginning on March 31, 

2010, the enterprises pay a commitment fee to Treasury to compensate the 

department for the ongoing financial support that it is providing to them. 

While the size of the commitment fee is subject to negotiation, it 

represents another potential long-term challenge to the enterprises’ 

financial viability. For example, like the dividend requirements, any unpaid 

commitment fees become a claim by Treasury against the assets of the 

enterprises in a liquidation proceeding, unless Treasury waives the fee. 

 

69GAO, Single-Family Housing: Opportunities to Improve Federal Foreclosure and 

Property Sale Processes, GAO-02-305 (Washington, D.C.: Apr. 17, 2002) and GAO, 

Department of Veterans Affairs: Actions Needed to Strengthen VA’s Foreclosed Property 

Management Contractor Oversight, GAO-08-60 (Washington, D.C.: Nov. 15, 2007). 

70At the foreclosure sale, the mortgage provider, such as Fannie Mae or Freddie Mac, 

obtains title to the foreclosed property. 

Page 53 GAO-09-782 Fannie Mae and Freddie Mac
 

Although it is not possible to predict what effects federal initiatives to 

respond the housing crisis and the Treasury agreements with the 

enterprises could have on the transition to a new structure, they could be 

substantial. For example, under the proposal to reconstitute the 

enterprises as for-profit GSEs, potential investors might not be willing to 

invest their capital if the reconstituted GSEs had a substantial volume of 

nonperforming mortgage assets or substantial financial obligations to 

Treasury. To minimize this risk, the federal government could arrange a 

transition process in which the government would retain nonperforming 

assets in a “bad bank” and spin off the performing assets of the enterprises 

to a “good bank” and key functions, such as issuing MBS, to investors in a 

reconstituted GSE.71 Or, the federal government could establish such a 

process as a means to terminate or privatize the enterprises. However, to 

the extent that the enterprises engage in activities during their 

conservatorships or incur financial obligations inconsistent with 

maintaining their long-term financial viability, the level of nonperforming 

mortgage assets and long-term costs to taxpayers ultimately may be higher 

than otherwise would be the case. 

Finally, regardless of what changes are implemented, policymakers should 

pay careful attention to how a potential transition is managed to mitigate 

potential risks to the housing finance system. The enterprises evolved over 

many years to become dominant participants in housing finance and, in 

some respects, their roles have expanded during the conservatorships. 

Therefore, transitioning to a new structure could have significant 

consequences for housing finance and should be managed carefully and 

perhaps implemented in phases with periodic evaluations to determine if 

any corrective actions would be necessary. For example, any changes 

likely would require regulators and institutions to make system changes 

and undertake other activities that would take extensive time to complete. 

Our previous work also has identified other key issues that likely would be 

critical components of any transition process.72 In particular, an effective 

communication strategy would be necessary to help ensure that all 

mortgage market participants, including lenders, investors, and borrowers, 

have sufficient information to understand what changes are being made 

and how and when they will be implemented. Moreover, it will be 

 

71Such proposals generally involve the federal government maintaining existing guarantees 

on the assets in the “bad bank” as well as assets in the “good bank” as may be required. 

72See GAO, Homeland Security: Critical Design and Implementation Issues, GAO-02-957T

(Washington, D.C.: July 17, 2002). 

Page 54 GAO-09-782 Fannie Mae and Freddie Mac
 

important to put effective strategies in place to help ensure that, under 

whichever reform strategy is chosen, the new financial institutions and 

their regulators will have the staffing, information technology, and other 

resources necessary to carry out their missions. 

We provided a draft of this report to FHFA, the Federal Reserve, HUD, and 

Treasury for their review and comment. While he was still the FHFA 

Director, James B. Lockhart III provided us with written comments, which 

are summarized below and reproduced in appendix II, as well as technical 

comments, which we incorporated as appropriate.73 Federal Reserve staff, 

HUD’s Assistant Secretary for Housing-Federal Housing Commissioner, 

and Treasury also provided technical comments, which were incorporated 

as appropriate. We also provided excerpts of a draft of this report to seven 

researchers whose studies we cited to help ensure the accuracy of our 

analysis. Six of the researchers responded and said that the draft report 

accurately described their research, while one researcher did not respond. 

Agency Comments 

and Our Evaluation 

In his comment letter, Lockhart stated that the report is timely and does a 

good job of summarizing the dominant proposals for restructuring the 

enterprises and summarizing their strengths and weaknesses. Lockhart 

also stated that initial attention should be to the role of mortgage finance 

in our society and how the government wants the institutions and markets 

that supply it to function and perform. In particular, he said this includes 

determining the most appropriate roles for private and public entities, 

competition and competitiveness, risks and risk management, and the 

appropriate channels and mechanisms for targeting the underserviced and 

protecting consumers. Further, he identified key questions and principles 

that he believes should be included in the debate on restructuring the 

enterprises. These principles include (1) deciding what the secondary 

market should look like, before considering specific institutions; (2) 

ensuring that the enterprises or any successors have well-defined and 

internally consistent missions; (3) ensuring that there is a clear 

demarcation of the federal government and the private sector in the 

secondary market; (4) establishing a regulatory and governance structure 

that ensures prudent risk-taking; and (5) ensuring that housing finance is 

subject to systematically prudent supervision that incorporates 

countercyclical capital to limit booms and busts. 

 

73Lockhart announced his resignation on August 6, 2009, and left FHFA on August 28, 2009. 

Page 55 GAO-09-782 Fannie Mae and Freddie Mac
 

We concur with the thrust of the view that revising the enterprises’ 

structures should take place in a measured way and in the context of a 

broader assessment of the housing finance system. As discussed in our 

report, the enterprises have been key components of the housing finance 

system for many years and, therefore, any changes to their structures are 

likely to have broad implications for that system and market participants. 

In this regard, we stated that it will be important for Congress to 

reevaluate the enterprises’ roles, structures, and performance, and 

consider structural reform options to facilitate mortgage finance while 

mitigating safety and soundness concerns. These options, under certain 

scenarios, envision very different approaches to structuring the secondary 

market for mortgage loans and facilitating housing opportunities for 

targeted groups, and we believe the broad implications of these various 

options need to be carefully considered before any final decisions are 

made. For this reason, our report addresses implications for various 

participants in the mortgage markets, including FHA. Further, we 

discussed that a carefully managed and potentially lengthy transition 

process needs to be established to help ensure the successful 

implementation of whatever structural reform option for the enterprises is 

chosen by Congress and the Executive Branch. 

Additionally, Lockhart said that FHFA, in its role as the enterprises’ 

conservator, as well as their mission and safety and soundness regulator, 

is working diligently with the Treasury and Federal Reserve to maintain or 

restore safe, sound, liquid, and vibrant mortgage markets. He said a 

principal focus of FHFA’s efforts has been facilitating the enterprises’ 

participation in the Home Affordable Modification and Refinance 

Programs. While he said the enterprises’ participation in these programs 

may result in near-term costs, he believes the programs will result in 

stronger and more stable housing markets, which will also benefit the 

enterprises. 

Finally, he made several suggestions regarding certain aspects of the draft 

report. These suggestions and our responses are described below: 

• The draft report should make clear that the structural reform options 

presented in the report are not exhaustive or mutually exclusive and that 

hybrids of these options also are possible and may prove to be the most 

appealing. We agree and, as the report notes, the options for revising the 

enterprises’ long-term structures generally fall along a continuum with 

some overlap between key features. For example, as Lockhart noted, 

options for privatizing or terminating the enterprises may involve 

establishing a government entity to insure mortgages originated by private 

Page 56 GAO-09-782 Fannie Mae and Freddie Mac
 

lenders. In addition, the government entity and reconstituted GSE options 

generally involve focusing enterprise activities on issuing MBS while 

downsizing or eliminating their mortgage portfolios. 

• The draft report should mention the enterprises’ performance in providing 

liquidity to mortgage markets. We agree that any discussion of the future 

roles of the GSEs should include consideration of their roles in providing 

securities that support an active and liquid mortgage market. As the report 

notes, providing liquidity to mortgage markets has been a key housing 

mission objective of the enterprises and that, while their secondary market 

activities have been credited with helping to establish a national and liquid 

mortgage market, their performance in providing support to mortgage 

markets during stressful economic periods is not clear. 

• While the draft report’s discussion of the safety and soundness concerns 

related to the government entity option is reasonably balanced and fair, it 

is short on negative details. In particular, (1) the draft report is organized 

in such a way that makes it easy for the reader to conclude that the safety 

and soundness benefits of the government entity option outweigh the 

added risks; (2) the table in the draft report’s Highlights page states that 

the lack of a “profit motive” for a government entity may mitigate risk 

should be rephrased to state that the option “addresses the conflict 

between private profits and public sector risk bearing;” and (3) the 

discussion in the draft report on the potential elimination of the 

enterprises’ mortgage portfolios fails to recognize that such an action is a 

component of some but not all proposals to reconstitute the enterprises as 

GSEs or to establish a government entity, and therefore, mentioning the 

benefit of doing so under one option (the government entity option) and 

not the other (the reconstituted GSE option) is a significant inconsistency. 

Regarding (1), we do not agree that the order of the text in the draft report 

implied that the benefits of the government entity option outweigh its 

risks. While this option offers potential safety and soundness advantages 

such as addressing deficiencies in the traditional enterprise structures and 

eliminating their mortgage portfolios, it also has potentially significant 

drawbacks, which need to be considered. In particular, we stated that 

managing the enterprises’ ongoing MBS business may be complicated and 

challenging, and government entities may lack the resources and expertise 

necessary to manage such challenges and risks effectively. Regarding 

(2), we agree with the thrust of this comment and have modified the text 

in the table in the Highlights page to make it consistent with the related 

figure and text in the body of the report. Regarding (3), we agree that any 

assessment of the options for revising the housing enterprises’ long-term 

structure should include discussion of the implications of retaining 

Page 57 GAO-09-782 Fannie Mae and Freddie Mac
 

mortgage portfolios. As described in the report, the government entity 

options we identified advocated the elimination of the enterprises’ 

portfolios. In contrast, the options we identified for reconstituting the 

enterprises as GSEs generally called for reducing the enterprises’ 

portfolios while one proposal called for their complete elimination. The 

report includes analysis of the potential implications of taking such steps 

regarding the enterprises’ mortgage portfolios under both options, as well 

as the possible elements of regulatory and oversight structures that could 

mitigate any potential safety and soundness and systemic stability risks. 

We are sending copies of this report to interested congressional 

committees and members. In addition, we are sending copies to FHFA, 

Treasury, the Federal Reserve, HUD, financial industry participants, and 

other interested parties. The report also is available at no charge on the 

GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

William B. Shear at (202) 512-8678 or shearw@gao.gov or Richard J. 

Hillman at (202) 512-8678 or hillmanr@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. GAO staff who made major contributions to this 

Gene L. Dodaro 

report are listed in appendix III. 

Acting Comptroller General of the United States 

Page 58 GAO-09-782 Fannie Mae and Freddie Mac
 

List of Committees 

The Honorable Christopher J. Dodd 

Chairman 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Joseph I. Lieberman 

Chairman 

The Honorable Susan M. Collins 

Ranking Member 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Tim Johnson 

Chairman 

The Honorable Mike Crapo 

Ranking Member 

Subcommittee on Financial Institutions 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Robert Menendez 

Chairman 

The Honorable David Vitter 

Ranking Member 

Subcommittee on Housing, Transportation 

 and Community Development 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

Page 59 GAO-09-782 Fannie Mae and Freddie Mac
 

The Honorable Edolphus Towns 

Chairman 

The Honorable Darrell Issa 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

The Honorable Paul E. Kanjorski 

Chairman 

The Honorable Scott Garrett 

Ranking Member 

Subcommittee on Capital Markets, Insurance 

 and Government Sponsored Enterprises 

Committee on Financial Services 

House of Representatives 

Page 60 GAO-09-782 Fannie Mae and Freddie Mac
Appendix I: Objectives, Scope, and 

Methodology 

Page 61 GAO-09-782 

Appendix I: Objectives, Scope, and 

Methodology 

The objectives of our report were to (1) discuss how the enterprises’ roles, 

structures, and activities have changed over time and their performance in 

achieving key housing mission objectives; (2) identify various options for 

revising the enterprises’ eventual structure; (3) analyze these options in 

terms of their potential capacity to achieve key housing mission and safety 

and soundness objectives; and (4) discuss how the federal government’s 

management of the conservatorships and response to the housing crisis 

could affect any transition. 

To address the first objective, we reviewed reports and studies on the 

enterprises and their regulation, including GAO reports, as well as reports 

from the Department of Housing and Urban Development (HUD), the 

Federal Housing Finance Agency (FHFA), the Office of Federal Housing 

Enterprise Oversight (OFHEO), the Congressional Budget Office (CBO), 

the Congressional Research Service (CRS), and independent researchers. 

We also reviewed legislative and charter documents, as well as an internal 

history of Fannie Mae, and financial performance data from a variety of 

sources. Through this research, we sought to identify key housing mission, 

safety and soundness, and other objectives that have been associated with 

the enterprises over the years, as well as their performance in meeting 

such objectives. In doing so, we identified and summarized recent 

literature that addressed the impact of the enterprises on affordability and 

opportunities for target groups. While GAO reviewed these studies and 

included those that were sufficiently methodologically sound for our 

limited purposes, users of this report should note that these studies are 

based on data prior to 2001 and contain limitations. Finally, we used data 

from the Securities Industry and Financial Markets Association (SIFMA) 

and OFHEO. As SIFMA’s data on mortgage-related issuance were 

consistent with other data sources and highlight well-established trends in 

mortgage-backed securities (MBS) and collateralized mortgage obligation 

activity, we found them and the OFHEO data on the balance sheets of the 

enterprises sufficiently reliable for our purposes. 

To address the second objective, we reviewed a variety of studies and 

proposals that have been made prior to and during the conservatorships to 

revise the enterprises’ structures. The inclusion of these studies and 

proposals is purely for research purposes and does not imply that we 

deem them definitive or without limitations. We also met with the authors 

of many of these studies and with researchers who have knowledge about 

housing finance, the operations of the enterprises, or who have made 

proposals to revise the enterprises’ structures. We met with 

representatives from FHFA, the Department of the Treasury (Treasury), 

the Federal Reserve, HUD, the Government National Mortgage Association 

 Fannie Mae and Freddie Mac 
Appendix I: Objectives, Scope, and 

Methodology 

(Ginnie Mae), CBO, the enterprises, bank and mortgage organizations, and 

trade and community groups. These interviews provided us with the 

different viewpoints about the proposals. 

For the third objective, we analyzed the proposed options for restructuring 

the enterprises in terms of the potential each proposal offered to achieve 

key housing mission and safety and soundness objectives. In our analysis, 

we also relied on principles associated with effective regulatory oversight. 

While it is not possible to conclusively determine the potential 

implications of the various proposals, we grounded our analysis of likely 

outcomes on previous research and evaluations. We also sought to 

include, where appropriate, assessments of how recent developments in 

financial markets (particularly actions by federal agencies to provide 

financial support to troubled banks and other institutions) could affect the 

various options. We recognize that a variety of factors, such as the 

condition of credit markets and the financial performance of the 

enterprises while in conservatorship, could change over time and affect 

our analysis of the options. 

For the final objective, which discusses how the federal government’s 

management of the conservatorships and response to the housing crisis 

could affect the transition of the enterprises to a new structure, we 

reviewed the actions undertaken by FHFA, Treasury, and the Federal 

Reserve, as authorized by the Housing Economic and Recovery Act of 

2008. We also reviewed financial data from Fannie Mae and Freddie Mac, 

including their quarterly 10Q and annual 10K filings. We reviewed and 

considered the future impact on the enterprises’ financial condition from 

recent initiatives such as the Homeowner Affordability and Stability Act 

and foreclosure initiation suspensions. We also discussed relevant issues 

with Treasury and enterprise representatives. 

We conducted this performance audit from October 2008 to September 

2009, from Washington, D.C., and in accordance with generally accepted 

government auditing standards. Those standards require that we plan and 

perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our audit objectives. 

Page 62 GAO-09-782 Fannie Mae and Freddie Mac
Appendix II: Comments from the Federal Appendix II: Comments from the Federal Housing Finance Agency 

Housing Finance Agency 

Page 63 GAO-09-782 Fannie Mae and Freddie Mac 
Appendix II: Comments from the Federal 

Housing Finance Agency 

Page 64 GAO-09-782 Fannie Mae and Freddie Mac
Appendix II: Comments from the Federal 

Housing Finance Agency 

Page 65 GAO-09-782 Fannie Mae and Freddie Mac
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 66 GAO-09-782 

Appendix III: GAO Contact and Staff 

Acknowledgments 

William B. Shear, (202) 512-8678, or shearw@gao.gov

In addition to the individual named above, Wesley M. Phillips, Assistant 

Director; Triana Bash; Martha Chow; Lawrance Evans, Jr.; Marc Molino; 

Robert Pollard; Barbara Roesmann; Stacy Spence; Paul Thompson; and 

Barbara Williams made key contributions to this report. 

 Fannie Mae and Freddie Mac 

GAO Contact 

Staff 

Acknowledgments 

(250423) 
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To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Public Affairs 

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