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GAO-11-33R 1 (2010-11-15)

handle is hein.gao/gaobaanvj0001 and id is 1 raw text is: G AGAO nAccoountabilty * Integrity * Reliability United States Government Accountability Office Washington, DC 20548 November 15, 2010 Congressional Committees Subject: The Cooperative Model as a Potential Component of Structural Reform Options for Fannie Mae and Freddie Mac On September 6, 2008, the Federal Housing Finance Agency (FHFA) placed the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorships. FHFA took this step after concern developed that the deteriorating financial condition of the two government-sponsored enterprises (GSE), which had about $5.4 trillion in combined financial obligations, threatened the stability of financial markets. Since then, the Department of the Treasury (Treasury) has provided financial support to Fannie Mae and Freddie Mac (the enterprises) to help stabilize their financial condition and help ensure their ability to continue to support housing finance. As of September 2010, Treasury had provided about $150 billion in capital contributions to support the enterprises, and the Congressional Budget Office has estimated that the total cost to taxpayers could be nearly $400 billion over a 10-year period. In recent months, Congress and the administration have been considering a variety of proposals to reform the enterprises in order to help ensure their safety and soundness and the effectiveness of the U.S. housing finance system. One structural reform option for the enterprises that has generated some interest in Congress and among housing finance participants and observers is known as the cooperative model. Congress chartered Fannie Mae and Freddie Mac to be for-profit corporations owned by shareholders. Their primary mission over the years has been to establish a liquid, secondary market for what are known as conventional conforming mortgages by purchasing such mortgages from lenders, which can use the proceeds to originate additional mortgages.' The enterprises' critics argue that their structures and federal sponsorship, which allowed for the issuance of debt at advantageous rates, have undermined market discipline and encouraged them to engage in profitable but potentially risky activities with inadequate capital levels. Under the cooperative model, the enterprises would be converted from shareholder-owned corporations to cooperatives owned by the lenders that sell mortgages to them. Proponents of the cooperative model believe it would promote safer and sounder GAO-11-33R Fannie Mae and Freddie Mac 1Conventional conforming mortgages are those mortgages that are not insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, or the Department of Agriculture and meet the enterprises' underwriting standards.

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