Because of implicit government backing, Fannie Mae discount notes became the second-largest short-term notes issued (second only to Treasury bills). The GSEs were the only two Fortune 500 companies exempt from regulation by the Securities and Exchange Commission.
Both GSEs had a line of credit with the US Treasury Department, and both GSEs were exempt from state and local income tax on corporate earnings. The GSEs were given monopoly privileges against which private enterprise could not compete.
claim that the GSE business model faces inherent conflicts due to its combination of government mission and private ownership. On average, GSE fixed-rate loans performed four times better, and GSE ARMs performed five times better. In almost every one of 1800 different comparisons covering years 2001 through 2008, GSE loan performance was exponentially better. The study segments loans four ways, by adjustable-rate mortgages (ARMs)-versus-fixed-rate, as well as by vintage, by FICO score and by loan-to-value ratio. The FHFA study compares, on an apples-to-apples basis, GSEs loan originations with those for private label securitizations. During 2008–2011, annual losses were 184 basis points. Freddie Mac's results are comparable.īy way of contrast, during 1991–2007, commercial banks' average annual loss rate on single-family mortgages was about 15 basis points.
Losses were disproportionately worse during the crisis years, 2008 through 2011, when Fannie's average annual loss rate was 52 basis points. According to the Annual Report to Congress, filed by the Federal Housing Finance Agency, over a span of 37 years, from 1971 through 2007, Fannie Mae's average annual loss rate on its mortgage book was about four basis points. The GSE business model has outperformed any other real estate business throughout its existence. A credit rating downgrade of the large insurer American International Group (AIG) led to a Septemrescue agreement with the Federal Reserve Bank for a US$85 billion secured loan facility, in exchange for warrants for 79.9% of the equity of AIG. The 94-year-old Merrill Lynch accepted a purchase offer by Bank of America for approximately US$50 billion, a big drop from a year-earlier market valuation of about US$100 billion. The collapse was the largest investment bank failure since Drexel Burnham Lambert in 1990. By September 15, 2008, the 158-year-old Lehman Brothers holding company filed for bankruptcy with intent to liquidate its assets, leaving its financially sound subsidiaries operational and outside of the bankruptcy filing. government to backstop the two GSEs with up to US$200 billion in additional capital turned out to be the first significant event in a tumultuous month among U.S.-based investment banking, financial institutions and federal regulatory bodies. financial markets, the conservatorship action and commitment by the U.S. The conservatorship action has been described as "one of the most sweeping government interventions in private financial markets in decades", and one that "could turn into the biggest and costliest government bailout ever of private companies". The two GSEs had outstanding more than US$5 trillion in mortgage-backed securities (MBS) and debt the debt portion alone was $1.6 trillion. The Treasury committed to invest as much as US$200 billion in preferred stock and extend credit through 2009 to keep the GSEs solvent and operating. The combined GSE losses of US$14.9 billion and market concerns about their ability to raise capital and debt threatened to disrupt the U.S. Main article: Financial crisis of 2007–2010