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Protecting the economy and homeowners: Four ways to restore Fannie and Freddie

January 21, 2016 Robert Shapiro

Bloomberg Government regularly publishes insights, opinion and best practices from our community of senior leaders and decision-makers. This column is written by former Under Secretary of Commerce for Economic Affairs, Robert Shapiro. He is chairman of Sonecon, an economic and security-related advisory firm, and Senior Fellow of the Georgetown University Center for Business and Public Policy. 

President Obama was right to boast about the American economy’s recent achievements in his State of the Union address.  American businesses have come back from the Great Recession and created more than 14 million jobs, along with record profits.  One happy result is today’s 5 percent unemployment rate, half the level in the second half of 2009.  U.S. growth also has outpaced the gains by the world’s other major, developed economies for five years.  Yet, one key aspect of the 2008-2009 crisis remains largely unaddressed – namely, the arrangements we use to finance housing.

This matters, because the right housing finance reforms could lower the likelihood of another crisis and increase the strength of this expansion.  Moreover, the Obama Administration and Congress clearly have the ability to carry out those reforms, especially by rewriting the operating terms and mission requirements of Fannie Mae and Freddie Mac, government-sponsored enterprises now run by the federal government.

Housing and the crisis

Until the financial crisis, Fannie Mae and Freddie Mac successfully promoted strong and steady increases in homeownership for average Americans for decades.  Congress created Fannie Mae in 1938 (and Freddie Mac 33 years later), and home ownership rates rose sharply from less than 43 percent in 1940 to more than 69 percent in 2005.  Fannie and Freddie underwrote these steady increases by purchasing or guaranteeing millions of mortgages written by private banks and thrifts, individually or bundled into mortgage-backed securities (MBS).  In this way, banks and thrifts could write more mortgages; and by 2005, Fannie and Freddie held or guaranteed half of America’s $12 trillion mortgage market.

The financial crisis uprooted this landscape.  Fannie and Freddie had borrowed trillions of dollars to purchase their huge portfolios of mortgages and MBS.  As the crisis drove up mortgage defaults and drove down housing prices, Fannie and Freddie found themselves bankrupt and unable to borrow.  In September 2008, the newly-created Federal Housing Finance Agency (FHFA) placed Fannie and Freddie under government conservatorship, the Treasury provided $187 billion in emergency financial assistance, and in return the Federal government claimed ownership of 80 percent of both companies.  By 2015, homeownership rates had fallen to 63.4 percent, the lowest rate in nearly 50 years.

Since 2012, Fannie and Freddie have been sufficiently profitable again to repay their initial $187 billion in loans, as well as some $50 billion more in forms of interest. Those payments are collected through a Treasury “sweep” of all of Fannie and Freddie’s profits on a quarterly basis.  Those sweeps improve the Treasury’s own accounts and the official federal deficit.  But they also leave Fannie and Freddie dependent on the government, since private shareholders cannot claim any returns on their investments.  In addition, these sweeps prevent Fannie and Freddie from building up their own reserves, to both support rising home ownership and weather the next housing downturn.

With a colleague, Elaine Kamarck from the Brookings Institution, I recently published a new strategy to both recapitalize Fannie Mae and Freddie Mac as wholly private enterprises dedicated to promoting private homeownership, and aggressively promote access to affordable housing for low-income Americans.  This plan should also ensure that Fannie and Freddie can weather the next serious downturn in the housing market.  Our strategy has four basic parts.

Ensure their solvency

First, much like the nation’s other very large private financial institutions, Fannie and Freddie will have to maintain capital reserves of four percent, many times their reserve ratios in 2008, and accept strict monitoring of their financial condition.  This is consistent with an internal Treasury analysis in 2011 recommending capital reserves of three to four percent for the two institutions.

Let Fannie and Freddie rebuild their capital

Second, in recognition of Fannie and Freddie’s repayments to the government of $239 billion, again some $50 billion more than they received in bailout payments, the Treasury would close the books on any remaining interest balance which they owe.  Therefore, the Treasury would end its quarterly sweep of Fannie and Freddie’s profits, so their future earnings can be used to rebuild their capital reserves and operating funds.

Transition to private ownership

Third, Fannie and Freddie would issue some $100 billion in new common stock in the equity market, to rebuild its capital and transition back to private ownership.  The combination of these new stock issues and their retained earnings from the end of the Treasury sweeps would provide the required four percent capital reserves.

Fund access to affordable housing

Fourth, in recognition of Fannie and Freddie’s commitment to affordable housing for all Americans, the Treasury would transfer the government’s current holdings of 80 percent of Fannie and Freddie’s common shares to the two trust funds created by Congress in 2008 to support construction of affordable rental housing, the Housing Trust Fund and the Capital Magnet Fund.  These transfers would provide $99.4 billion to expand access to decent housing for low and very low income households, sufficient to produce an additional 250,000 affordable rental housing units per year for 20 years, and support more than 160,000 additional construction jobs per year for 20 years.

This strategy can protect American taxpayers from massive exposure in another crisis, return Fannie and Freddie to private ownership, and provides the resources to support both rising home ownership and broad access to affordable housing.

To review the full Shapiro-Kamarck Plan, visit

This column does not necessarily reflect the opinion of Bloomberg Government. 

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