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. 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, 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 low- cost 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. 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. 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 recovered by redemption of the stock or by other means. 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. 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. 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. 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. 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. 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. 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. 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.