The Rescue of Fannie Mae and Freddie Mac – Module C: GSE Credit Facility

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are two government-sponsored enterprises (GSEs) that were created to support the secondary mortgage market and to fulfill certain affordable-housing goals (FCIC 2011a, 38-39). They do this by purchasing whole loans from mortgage lenders and compiling them into mortgage-backed securities (MBS), which they then guarantee and sell to investors (FCIC 2011a, 39). The GSEs also retain some of the loans they purchase as portfolio investments (FCIC 2011a, 39). The GSEs raise funds by issuing debt, which, prior to 2008, had been perceived by markets to be a very safe investment; as a result, GSE debt at the time was held by financial institutions and government entities around the world (FCIC 2011a, 309).

By the middle of 2007, issues confined to subprime mortgages had spilled over into the wider US mortgage market, causing an overall contraction in private securitization and an increase in the share of new mortgages purchased by Fannie Mae and Freddie Mac (FCIC 2011b, 311-312). Not long after, the GSEs started to run into serious problems of their own. Starting in late 2007, the two entities began to post huge quarterly losses, with each amassing several billions in losses by the middle of 2008 (FCIC 2011b, 309-310). Moreover, as the market began to perceive the steep decline of the GSEs, investors started to pull back from their debt and capital offerings, while concerns about the GSEs’ solvency abounded (FCIC 2011b, 313-316). Compounding these worries was the inordinately high leverage of the GSEs (FCIC 2011b, 309). At the end of 2007, the GSEs were leveraged 75-to-1, holding or assuring $5.3 trillion of mortgage assets on a collective capital base of only $70.7 billion (FCIC 2011b, 309).

On September 6, 2008, pursuant to the authority of the Housing and Economic Recovery Act (HERA) of 2008, the Federal Housing Finance Agency (FHFA), in cooperation with the US Treasury and the Federal Reserve, put the GSEs into conservatorship as part of a four-part rescue plan designed to prevent their likely insolvency and the concomitant collapse of the US mortgage market (Treasury 2008b). Other components of the plan were to: (1) enter into senior preferred stock purchase agreements (SPSPAs) with each GSE, (2) establish a secured Credit Facility for each GSE, and (3) purchase their mortgage-backed securities (Treasury 2008b). This case study focuses on the establishment of the GSE Credit Facility.

The GSE Credit Facility (“the Credit Facility”) was established to provide secured loans—as needed—to Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks (FHLBs), which made up the group of government-sponsored enterprises that operated in the US mortgage market (Treasury 2008a). Our primary focus herein is to examine the facility with respect to Fannie Mae and Freddie Mac. Much of the discussion that follows, however, also applies to the FHLBs. Like the GSEs, no FHLB utilized the facility before it expired on December 31, 2009 (Frame et al. 2015, 17).

Under the Credit Facility, Treasury could extend unlimited funding^FNFunding was subject only to the federal debt ceiling, which was raised by $800 billion with the enactment of HERA (FCIC 2011b, 316-317). to the GSEs, although—in keeping with requirements set out by HERA—no loan it issued could mature later than December 31, 2009 (Treasury 2008a). By design, the Credit Facility was unlimited, in effect allowing it to serve as a full liquidity backstop for the GSEs (Treasury 2008b).

The Credit Facility offered only short-term loans, usually with maturities ranging from seven to 30 days (Treasury 2008a). In the interest of the taxpayer, all loans were required to be secured by satisfactory collateral, which Treasury defined as mortgage-backed securities issued by Fannie Mae and Freddie Mac or FHLB advances (Treasury 2008a). Treasury was responsible for setting collateral margins, while FRBNY was responsible for valuing and managing the collateral offered by the GSEs (Treasury 2008a; Treasury 2010, GSE-10).

The Credit Facility charged an interest rate equivalent to the daily London Interbank Offered Rate (LIBOR) plus a premium of 50 basis points, which was meant to protect taxpayers’ investment (Treasury 2008a; Treasury 2010, GSE-10). The Treasury Secretary could alter the interest rate charged by the Credit Facility as he or she saw fit (Treasury 2008a).

Treasury funded the Credit Facility using its account at the Federal Reserve Bank of New York (FRBNY), which served in a custodial role during the program’s existence (Treasury 2008a). All loan requests were subject to the approval of the Treasury, and the Treasury Secretary held the power to set the terms on individual loans (Treasury 2008a).

Other conditions pertaining to the length and amount of each loan were as follows:

• "The term of a loan may not be extended, but a maturing loan could be replaced with a new loan under the same borrowing procedures as the initial loan."
• “Loans could be pre-paid with two days’ notice, and loans could be called before their scheduled maturity date.”
• “Loan amounts would be based on available collateral” (Treasury 2008a).

The Credit Facility expired on December 31, 2009, having gone unused by both Fannie Mae and Freddie Mac (Treasury Fact Sheet 2008a; Frame et al. 2015, 17). As it turned out, both entities were able to satisfy their liquidity requirements elsewhere on more favorable terms (Fannie Mae 2009, 125-126; Freddie Mac 2009, 126-127).

Even as the Credit Facility went unused, the Treasury remained a primary source of funding for the GSEs. From September 2008 through December 2009, the two entities collectively drew more than $110 billion from Treasury under the SPSPAs (Thompson 2021, sec. “Program Description”). At the end of 2009, Treasury effectively uncapped Treasury’s commitment via the SPSPAs, allowing the government to provide unlimited funding to the GSEs from 2010-2012, after which time the funding limit reverted to $200 billion per GSE plus any amounts it had drawn during that period (Thompson 2021, sec. “Program Description”). This arrangement—made possible by the second amendment to the SPSPAs—was critical to maintaining confidence in the GSEs, as both the Credit Facility and the MBS purchase program were set to expire on December 31 (Thompson 2021, sec. “Program Description”; Treasury 2008b).