Fannie Mae and Freddie Mac are stockholder-owned, government-sponsored enterprises (GSEs), which purchase existing mortgages, guarantee investors that the mortgages will be paid on time, pool the mortgages into mortgage-backed securities (MBSs), and either keep the MBSs as an investment or sell the MBSs to investors. Congressional charters give the GSEs a special relationship with the federal government, and it is widely believed that the federal government implicitly guarantees their $1.2 trillion in bonds and $3.7 trillion in MBSs. The charters give these GSEs special public policy goals aimed at providing liquidity in the mortgage market and promoting homeownership for underserved groups and locations. In 2008, the GSEs' financial condition had weakened and there were concerns over their ability to meet obligations. On September 7, 2008, the federal government took control of these GSEs from their stockholders and management in a process known as conservatorship. The goal of conservatorship is to restore the GSEs' financial strength and to return control to their stockholders and management. Congressional interest in Fannie Mae and Freddie Mac has increased in recent years, primarily because the federal government's continuing conservatorship of these GSEs has raised doubts about their future and concerns about the potential cost of supporting them. Congressional interest has been reflected by the introduction of bills to reform or replace the GSEs and by oversight hearings. This report presents, in analytical question and answer form, the major issues surrounding Fannie Mae's and Freddie Mac's financial conditions, and various public policy options under discussion. A glossary of terms is included at the end of this report. Prior to the development of the secondary mortgage market, mortgage markets were local, and there were significant differences across the nation in mortgage rates and relatively large fluctuations in lending activity. Primary lenders had to balance their lending practices with their deposits received, which led to severe credit shortages during economic downturns, when savings accounts were depleted by withdrawals. This shortage was exacerbated due to the concentration of major money centers in areas like Chicago and New York, far from many who needed home loans. There was no way to move funds from these areas where mortgage money was available to other areas, such as California, where it was in relatively short supply. In effect, this amounted to a geographic barrier that prevented the law of supply and demand from operating on a national level in the home loan market. The secondary mortgage market combined these many regional mortgage markets into a single national market that draws financing from around the world. To encourage improvement in housing standards and conditions and to provide a system of mutual mortgage insurance, Congress passed, and President Franklin D. Roosevelt signed into law, the National Housing Act in 1934. Title III of the National Housing Act established national mortgage associations, giving rise to the creation of Fannie Mae. In its original form, Fannie Mae was a federal government agency that was chartered to support government-backed mortgages and carry out some government subsidy functions. In 1954, Congress re-chartered Fannie Mae as a mixed government and private-sector entity, with a clearly delineated separation between its market-oriented (i.e., secondary mortgage trading) and governmental (i.e., special assistance and managing and liquidating government-held mortgages) functions. In 1968, Congress split the firm into two distinct organizations, with the secondary market arm retaining the Fannie Mae name and the government functions arm taking the name Ginnie Mae, short for the Government National Mortgage Association. The partitioning legislation re-chartered Fannie Mae as a GSE to become completely privately owned with no federal funding. Fannie Mae completed this transition in 1970. In 1970, Congress enacted the Emergency Home Finance Act, which authorized Fannie Mae to buy conventional mortgages. Fannie Mae bought most of the mortgages from mortgage bankers. Savings and loans, the other major source of mortgage money, were restricted to holding mortgages and were generally unable to work with Fannie Mae. To facilitate secondary market trading of conventional mortgages for savings and loan associations, the act created Freddie Mac as a wholly owned subsidiary of the Federal Home Loan Bank System (FHLBS). In 1989, Congress re-chartered Freddie Mac so that its shares could trade on the New York Stock Exchange, in the same manner as Fannie Mae's. The 1989 act also did away with the separate missions of Fannie Mae and Freddie Mac, with the result that today the two enterprises have similar characteristics. Fannie Mae and Freddie Mac purchase mortgages that lenders have already made to homeowners. These mortgages must meet Fannie Mae's and Freddie Mac's standards and not exceed the conforming loan limit. These mortgages are guaranteed by the purchasing GSE, pooled into MBSs, and either sold to investors or kept by the GSE as an investment. In the second quarter of 2013, Fannie Mae reported record profits of $59 billion and Freddie Mac reported near record profits of $5 billion. For calendar 2012, both had record profits. Table 1 summarizes the losses and profits of Fannie Mae and Freddie Mac since 2006. The GSEs' losses that started in late 2006 were notable because, previously, the GSEs had been consistently profitable. Prior to 2006, Fannie Mae had not reported a full-year loss since 1985, and Freddie Mac had never reported a full-year loss since it became stockholder owned. Two major sources of losses for mortgage lenders, including the GSEs, have been loans to borrowers with less than prime credit (subprime) and certain types of mortgages to borrowers with credit between prime and subprime (Alt-A). At the end of 2012, Fannie Mae held $15.1 billion in private-label MBSs backed by subprime mortgages and held $17.1 billion in private-label MBSs backed by Alt-A mortgages. Freddie Mac held $44.4 billion in private-label MBSs backed by subprime mortgages and $14.8 billion in private-label MBSs backed by Alt-A mortgages. The GSEs have, in addition, increased loan loss reserves in anticipation of continuing losses. If losses on foreclosed mortgages are less than predicted, the reserves could be reduced, which would improve the GSEs' financial condition. If losses are greater on foreclosed mortgages, the GSEs' financial condition would worsen. Starting in 2008, Fannie Mae and Freddie Mac have tightened their lending standards. For example, the average FICO score of a 2007 mortgage purchased by Freddie Mac was 703, in 2008 it was 722, and in the first quarter of 2013 it was 753. Fannie Mae shows a similar increase in FICO scores. Approximately 76% of Fannie Mae's single-family book of business has been purchased in 2008 or more recently; the number for Freddie Mac is approximately 71%. Since the third quarter of 2008, the Federal Housing Finance Agency (FHFA), as conservator of the GSEs, has asked Treasury for a total of $116.1 billion to increase Fannie Mae's assets to offset its liabilities, and a total of $71.3 billion for Freddie Mac. Since the second quarter of 2012, neither GSE has required Treasury's support. Technically, Treasury support for the GSEs comes through purchases of GSE senior preferred stock. Table 2 reports the amounts, including the $1 billion of senior preferred stock that each GSE gave Treasury when they were taken into conservatorship. This stock is senior to (has priority over) all other common and preferred stock; it is the only stock currently receiving dividends. In addition to Treasury's purchases of senior preferred stock, the Federal Reserve (Fed) has purchased GSE bonds and MBSs. In programs that started in September 2008 and ended in March 2010, the Fed and Treasury together purchased $1,135.9 billion in MBSs. On September 21, 2011, the Fed decided to begin reinvesting MBS principal repayments in other MBSs. As of July 31, 2013, the Fed held $1.0 trillion of Fannie Mae's and Freddie Mac's MBSs. To expedite reducing assets of the GSEs, Treasury, FHFA, and each of the GSEs amended the separate support contracts on August 17, 2012, so that each GSE pays Treasury whatever profits it earns each quarter. If there are no profits, there is no payment. Previously each GSE made quarterly payments on a 10% dividend on the senior preferred stock. Fannie Mae's and Freddie Mac's financial problems create no risks for homeowners who want to stay in their homes and who do not want to refinance. Homeowners continue to pay their existing mortgages. Treasury's actions of lending money to the GSEs and the Fed's purchases of the GSEs' MBSs appear to have helped stabilize the secondary mortgage market and provided a continuing flow of funds to purchase new homes and to refinance existing mortgages. Under conservatorship, the GSEs have become active in loan modifications and the refinancing of existing mortgages that they own. They have raised the credit and documentation standards on the mortgages that they purchase, with stricter underwriting rules and higher fees. These actions are similar to other lenders' behavior during the recent recession and in previous economic slowdowns. In most areas of the country, FHA can guarantee mortgages of $271,050 or less as compared with Fannie Mae's and Freddie Mac's $417,000 loan limit. In high-cost areas, the FHA maximum guarantee is $729,750 compared with $625,500 for Fannie Mae and Freddie Mac. In any economic environment, Fannie Mae and Freddie Mac face the variety of risks that many other companies face. The GSEs purchase home mortgages. They package most mortgages into MBSs, selling some and holding others in their investment portfolios.