Effects of Recapitalizing Fannie Mae and Freddie Mac Through Administrative Actions
CBO examines how recapitalizing Fannie Mae and Freddie Mac through administrative actions would affect such factors as CBO’s budget projections and cash flows between the two enterprises and their shareholders, including the Treasury.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that play a central role in the U.S. housing finance system. In September 2008, their regulator, the Federal Housing Finance Agency, used its authority to take over management of the GSEs’ assets and business, a concept known as conservatorship. Since then, Fannie Mae and Freddie Mac have relied on federal support to remain financially solvent. They have also paid most of their earnings to the Treasury, which owns dominant stakes in the two GSEs.
In late 2019, the Treasury allowed the GSEs to retain more of their earnings to rebuild their capital reserves. The Treasury also recommended administrative actions aimed at returning the GSEs to private ownership—including recapitalization and an end to their conservatorships—and called for legislative action to resolve the GSEs’ status.
In this report, the Congressional Budget Office examines options for recapitalizing the GSEs by allowing them to retain all of their profits for an initial period, after which they would sell new common stock to investors to replace the Treasury’s ownership stake. Those actions would be taken administratively. The analysis looks at how the recapitalization options would affect various factors:
- CBO’s budgetary treatment of the GSEs and its baseline budget projections;
- Cash flows between the GSEs and the Treasury and other shareholders;
- The possibility that the GSEs would be released from conservatorship, remain in conservatorship, or be put in receivership; and
- Mortgage markets and other federal institutions that play a role in the housing finance system.
In some of the scenarios that CBO analyzed, the GSEs would be able to raise enough funds to meet their capital requirements, repurchase all of the outstanding preferred shares issued before their conservatorships, compensate the Treasury for its stake in the GSEs, and become privately owned firms. In other scenarios, the GSEs would not be able to raise enough to meet their capital requirements. In those cases, their regulator and the Treasury would need to explore other plans, such as putting the GSEs in receivership (which would involve liquidating their assets or transferring the assets to other entities).