After years of calls for Congress to create stronger regulatory oversight of Fannie Mae and Freddie Mac, time ran out in 2008 when the two mortgage giants collapsed, forcing a costly government bailout. Congress created Fannie Mae during the Great Depression to buy mortgages and free up capital so that lenders could make more loans, especially to low- and middle-income buyers. Congress launched Freddie as a competitor in 1970. The Department of Housing and Urban Development (HUD) first assumed regulatory duties over Freddie and Fannie in 1992, while an independent office within HUD — the Office of Federal Housing Enterprise Oversight (OFHEO) — was tasked with maintaining their safety and soundness. Unlike bank regulators, OFHEO needed budget approval from a Congress — a Congress on which Freddie and Fannie lavished $170 million on lobbying over the past decade. The two companies also contributed $4.8 million in congressional campaign donations over the last 20 years.
Freddie and Fannie’s unique status as government-sponsored enterprises allowed them to borrow money at a lower market rate than that imposed on mortgages they bought up. That status also allowed the companies to put up far less capital behind their investments than banks. As early as 2000, the Treasury Department urged Congress to tighten oversight of the companies, and by 2004 the Government Accountability Office (GAO) explicitly recommended a new, less fragmented regulatory office with greater oversight and enforcement powers. “I believe the evidence clearly shows that the current regulatory structure is not well-equipped,” Comptroller General David M. Walker told Congress in 2005. Should the companies encounter trouble, warned Walker, it could have “destabilizing effects on financial markets.” No reforms came about, however. Fannie and Freddie then expanded their reach into risky subprime securities. Complex summaries of their monthly purchases came streaming into OFHEO, but no alarms sounded until January 2007. Freddie and Fannie went on to report losses of more than $5 billion that year — their first combined loss in a quarter-century. As mortgage delinquencies continued to pile up among Americans, in September the government took over the two companies at a cost then estimated at $25 billion by the Congressional Budget Office. An OFHEO spokeswoman did not respond to a request for comment, but its director told Congress back in February — five years after the office asked for more authority — that “we need a stronger, single, and unified regulator for the housing GSEs [Government-Sponsored Enterprises].”
The September 2008 rescue plan finally placed Freddie and Fannie under government conservatorship with a new independent regulator, the Federal Housing Finance Agency (FHFA). Without a federal takeover, the two companies, whose stock fell 98 percent in a year, “could have caused a significant systemic event” in global markets, according to FHFA’s director. The companies have continued to lose money; their third-quarter losses indicate the bailout might become significantly more expensive than expected.