GSE Background & History
1992: The issue of Fannie and Freddie becoming involved in the mortgage-backed securities began when the Congress, according to a speech by Ben Bernanke, “adopted the Federal Housing Enterprises Financial Safety and Soundness Act, in effect, requiring Fannie and Freddie to devote a percentage of their lending to support affordable housing increasing their pooling and selling of such loans as securities.” (Ben S. Bernanke, The Community Reinvestment Act: Its Evolution and New Challenges, speech, Community Affairs Research Conference, Washington, D.C., Federal Reserve System 03/30/ 07)
1997: The Taxpayer Relief Act of 1997 allowed First Union Capital Markets and Bear, Stearns & Co. launch the first publicly available securitization of Community Reinvestment Act (CRA) loans, issuing $384.6 million of such securities. All carried Fannie Mae guarantee as to timely interest and principal. (First Union Capital Markets Corp., Bear, Stearns & Co. Price Securities Offering Backed By Affordable Mortgages PR Newswire, 2000 AND Fannie Mae increases CRA options, American Bankers Association Banking Journal, November, 2000.)
1998: Inflation-adjusted home price appreciation exceeded 10% per year in most West Coast metropolitan areas providing oxygen to the national housing bubble, according to Robert J. Schiller, Professor of Economics and Finance at Yale University. (“Understanding Recent Trends in House Prices and Home Ownership” Kansas City Federal Reserve Bank 08/01/07.)
July, 1999: The Department of Housing and Urban Development, led by Secretary Andrew Coumo, announced a Clinton-era program to provide $2.4 trillion for “affordable housing.” Also that month, Countrywide Financial and Fannie Mae signed a Strategic agreement which lead to Countrywide becoming the country’s leading mortgage provider to poor minorities. (Cuomo Announces Action To Provide $2.4 Trillion In Mortgages For Affordable Housing For 28.1 Million Families US Department of Housing and Urban Development 07/29/99)
September, 1999: Fannie Mae, according to an article in the New York Times, “eased the credit requirements on loans that it will purchase from banks and other lenders … and will encourage banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.” (Fannie Mae Eases Credit To Aid Mortgage Lending The New York Times 09/30/99)
2002: The financial markets had gone through the collapse of the dot-com bubble, but, the housing bubble continued to gain steam. At this point annual appreciation had reached its highest level in over 20 years. (Annual Home Appreciation Rates, California 2002-2003 ForcastChart.com)
2003: President George W. Bush supported the expansion of the low-income housing program leading Fannie Mae and Freddie Mac, to buy $81 billion in subprime securities. Later that year the Bush Administration pushed for new oversight of Fannie and Freddie to be conducted by the Department of the Treasury, but that move was blocked by Congress. (“How HUD Mortgage Policy Fed The Crisis”. Washington Post, 06/10/08, Leonnig)
2004-2007: Many banks, mortgage underwriters and other lenders, abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender’s ability to securitize and repackage subprime loans.
February, 2007: the housing market had slowed to the point that Subprime industry collapsed leading more than 25 subprime lenders to declare bankruptcy, announce significant losses, or put themselves up for sale. (The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown CCH Federal Banking, Bianco, 2008)
April 7, 2007: New Century Financial, the largest U.S. independent provider of home loans to people with poor credit histories, collapsed amid rising subprime delinquencies and defaults. (New Century files for Chapter 11 bankruptcy CNN 04/03/07)
July, 2008: Congress enacts the Housing Economic Recovery Act of 2008 (“HERA”). This act temporarily authorized the US Treasury to make investments in the GSEs to stabilize their financial condition.
September 6, 2008: the director of the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship run by the FHFA. The move was publically supported by both Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. According to the terms of the conservatorship, in exchange for future support and capital investments of up to US$ 100 billion in each GSE, Fannie and Freddie each issued to the Treasury US $1 billion of senior preferred stock, with a 10% coupon, without cost to the government.
2009: a total of 3,957,643 foreclosures were filed on 2,824,674 properties during the year, up 21 percent from 2008. (A record 2.8 million properties receive foreclosure notices in 2009 RealtyTrac 2009)
2010: An internal Treasury memo between the Treasury memo between Undersecretary Jeffrey Goldstein to Treasury Secretary Geithner recommends a course of action that will “make clear the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.” (Gretchen Morgenson, “The Untouchable Profits of Fannie Mae and Freddie Mac,” New York Times, 2/15/14)
August 7, 2012: the US Treasury and the GSEs (Fannie and Freddie) agreed to, but did not enact, what is known as “Third Amendments” to the conservancy action that would, in effect, change the 10% coupon to a 100% coupon – effectively wiping out all other bond and shareholders – a group that includes retirees, pension funds, community banks, and insurance companies.
January 1, 2013: The Third Amendments were enacted as agreed upon on August 7, 2013.
June 25, 2013: US Senators Bob Corker (TN-R) and Mark Warner (VA-D) introduced the Housing Finance Reform and Taxpayer Protection Act of 2013 (S. 1217)
July 22, 2013: PATH Act authored By Representative Jeb Hensarling (TX-R-05) was introduced.
March 9, 2014: US Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) introduced their version of the Housing Finance Reform and Taxpayer Protection Act of 2014 (S. 1217)