The Paths to Mortgage Finance Reform and Their Budgetary Implications

This article originally appeared at Cato. Click here to read the full paper.

By Ike Brannon and Mark Calabria

The passage of the Housing and Economic Recovery Act in July of 2008 expanded the federal government’s authority to place Fannie Mae and Freddie Mac into conservatorship. As exercised, under the conservatorship the government secured the right to stock warrants worth 79.9% of the company as well as a ten percent dividend on its gross investment. The existing shareholders kept the other 20.1%.

However, the terms of the conservatorship were repeatedly amended. As the two GSEs returned to profitability, the government amended the conservatorship to lay claim to the entire net worth of the two government-sponsored enterprises, which it swept into Treasury’s coffers each quarter. This move effectively froze out the non-government shareholders from any residual profits.
It also allowed the federal government to report sharply lower deficits than would have otherwise been the case.  As of 2014 the government had recouped its core $187.5 billion investment in the two and Congress is now contemplating major reforms of the mortgage finance sector.