Fannie Mae and Freddie Mac: Recent Administrative Developments

Fannie Mae and Freddie Mac: Recent
April 5, 2021July 19, 2024
Administrative Developments
Darryl E. Getter
Congress chartered Fannie Mae and Freddie Mac, also known collectively as the Congress chartered Fannie Mae and Freddie Mac, also known collectively as the government-
Enterprises, to Specialist in Financial Specialist in Financial
sponsored enterprises (GSEs), to promote homeownership by providing liquidity to the promote homeownership by providing liquidity to the
Economics
secondary mortgage market. The secondary mortgage market. The GSEs Economics Enterprises specifically facilitate financing for single-family specifically facilitate financing for single-family

residential mortgages and residential mortgages and multifamily (apartment and condominium) construction. After multifamily (apartment and condominium) construction. After
purchasing pools of single-family 30-year fixed rate mortgages, the purchasing pools of single-family 30-year fixed rate mortgages, the GSEsEnterprises retain the credit retain the credit

(default) risks from the whole (default) risks from the whole mortgages and subsequently issue mortgage-backed securities mortgages and subsequently issue mortgage-backed securities
(MBSs), which are bond-like securities. Investors who purchase MBSs are guaranteed a return on their initial principal and (MBSs), which are bond-like securities. Investors who purchase MBSs are guaranteed a return on their initial principal and
interest, but they assume prepayment risk, which is the risk that borrowers prepay their mortgages ahead of schedule. In interest, but they assume prepayment risk, which is the risk that borrowers prepay their mortgages ahead of schedule. In
contrast to the original mortgages, the MBSs are relatively more liquid, meaning they can be exchanged for cash more contrast to the original mortgages, the MBSs are relatively more liquid, meaning they can be exchanged for cash more
quickly with little change in their quoted prices. If institutional investors from around the globe are willing to hold liquid quickly with little change in their quoted prices. If institutional investors from around the globe are willing to hold liquid
MBSs, then additional funds are channeled to the nation’s mortgage market (particularly to support 30-year fixed rate MBSs, then additional funds are channeled to the nation’s mortgage market (particularly to support 30-year fixed rate
mortgages). National mortgage rates tend to fall as the supply of funds in this market increases, makingmortgages). National mortgage rates tend to fall as the supply of funds in this market increases, making homeownership more homeownership more
affordable. affordable.
The Federal Housing Finance Agency (FHFA), an independent federal government agency created by the Housing Economic The Federal Housing Finance Agency (FHFA), an independent federal government agency created by the Housing Economic
and Recovery Act of 2008 (HERA, P.L. 110-289),and Recovery Act of 2008 (HERA, P.L. 110-289), is the is the GSEsEnterprises’ primary ’ primary supervisorregulator. FHFA regulates the . FHFA regulates the GSEsEnterprises for prudential for prudential
safety and soundness and to ensure that they meet their affordable housing mission goals. In September 2008, the safety and soundness and to ensure that they meet their affordable housing mission goals. In September 2008, the GSEs
Enterprises experienced losses that exceeded their statutory minimum capital requirement levels as a result of above-normal mortgage experienced losses that exceeded their statutory minimum capital requirement levels as a result of above-normal mortgage
defaults. The defaults. The GSEsEnterprises also experienced losses following spikes in short-term borrowing rates that occurred while they were also experienced losses following spikes in short-term borrowing rates that occurred while they were
funding long-term assets held in their portfolios. The funding long-term assets held in their portfolios. The GSEsEnterprises were subsequently placed into conservatorship by FHFA, which were subsequently placed into conservatorship by FHFA, which
currently has the powers of management, boards, and shareholders until the currently has the powers of management, boards, and shareholders until the GSEs’ Enterprises’ financial safety and soundness can be financial safety and soundness can be
restored. In addition, the U.S. Treasury provides financial support through the restored. In addition, the U.S. Treasury provides financial support through the Senior Preferred Stock Purchase Agreements
senior preferred stock purchase agreements (PSPAs), which stipulate that the (PSPAs), which stipulate that the GSEsEnterprises must pay dividends to Treasury rather than private shareholders while they are under must pay dividends to Treasury rather than private shareholders while they are under
conservatorship. On September 30, 2019, Treasury announced stipulations to the PSPAs that would allow the conservatorship. On September 30, 2019, Treasury announced stipulations to the PSPAs that would allow the GSEsEnterprises to retain to retain
their earnings for the purpose of accumulating capital reserves in preparation for eventual release from conservatorship. their earnings for the purpose of accumulating capital reserves in preparation for eventual release from conservatorship.
Congressional interest in the Congressional interest in the GSEsEnterprises has continued since conservatorship. For one reason, the final costs to the U.S. Treasury has continued since conservatorship. For one reason, the final costs to the U.S. Treasury
(and, by proxy, to U.S. taxpayers) of providing the (and, by proxy, to U.S. taxpayers) of providing the GSEsEnterprises financial support are unknown. In addition, the financial support are unknown. In addition, the GSEsEnterprises’ future ’ future
viability could affect the availability of single-family 30-year fixed rate mortgage loan products. Although these mortgage viability could affect the availability of single-family 30-year fixed rate mortgage loan products. Although these mortgage
products are arguably popular with borrowers, private lenders may be reluctant to retain in portfolio and fund relatively less products are arguably popular with borrowers, private lenders may be reluctant to retain in portfolio and fund relatively less
liquid mortgages for several decades. Congressional interest has been reflected by various draft proposals, bills, and liquid mortgages for several decades. Congressional interest has been reflected by various draft proposals, bills, and o versight
oversight hearings on housing finance reform. During the hearings on housing finance reform. During the 116th118th Congress, for example, H.R. 5549, End of GSE Conservatorship Preparation Act of 2023, would require the Treasury Secretary to submit to Congress completed proposals for the termination of the Enterprises’ conservatorships Congress, for example, the Senate Committee on Banking, Housing,
and Urban Affairs released a proposal regarding the GSEs’ role in the housing finance system. .
Meanwhile, FHFA’s conservatorship goals have focused primarily on managing the Meanwhile, FHFA’s conservatorship goals have focused primarily on managing the GSEsEnterprises’ liquidity, operational, and credit ’ liquidity, operational, and credit
risks. FHFA has directed the risks. FHFA has directed the GSEsEnterprises to standardize numerous processes to foster greater liquidity in the market for their MBSs. to standardize numerous processes to foster greater liquidity in the market for their MBSs.
The The GSEsEnterprises are also being required to share more of the credit risk linked to their single-family mortgage purchases with the are also being required to share more of the credit risk linked to their single-family mortgage purchases with the
private sector. Greater uniformity is expected to provide greater data integrity and reduce pricing irregularities, thereby private sector. Greater uniformity is expected to provide greater data integrity and reduce pricing irregularities, thereby
fostering efficient operation of the primary and fostering efficient operation of the primary and s econdarysecondary mortgage markets. mortgage markets.
On October On October, 28, 2019, FHFA announced a strategic plan to prepare the 28, 2019, FHFA announced a strategic plan to prepare the GSEsEnterprises for their eventual exit from conservatorship. for their eventual exit from conservatorship.
FHFA also adopted a final rule on December 17, 2020, that establishes a capital regulatory framework for FHFA also adopted a final rule on December 17, 2020, that establishes a capital regulatory framework for GSEs the Enterprises to be in to be in
place once they exit conservatorship. The capitalization requirements are designed to increase the place once they exit conservatorship. The capitalization requirements are designed to increase the GSEsEnterprises’ resiliency to another ’ resiliency to another
severe financial downturn. Furthermore, FHFA directs the severe financial downturn. Furthermore, FHFA directs the GSEsEnterprises to pursue programs to meet affordable mission goals for to pursue programs to meet affordable mission goals for
low- and moderate-income households as mandated in their congressional charters. However, FHFA has also limited the low- and moderate-income households as mandated in their congressional charters. However, FHFA has also limited the
GSEsEnterprises’ activities in the multifamily (e.g., apartments) lending space that are not explicitly linked to their affordable mission ’ activities in the multifamily (e.g., apartments) lending space that are not explicitly linked to their affordable mission
goals. If the goals. If the GSEsEnterprises were to exit conservatorship under current circumstances, their attempts to sustain profitability levels to were to exit conservatorship under current circumstances, their attempts to sustain profitability levels to
meet shareholder equity requirements with limitations on lending activities could pose a future dilemmameet shareholder equity requirements with limitations on lending activities could pose a future dilemma . .
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Fannie Mae and Freddie Mac: Recent Administrative Developments
Contents
Introduction ..................................................................................................................................... 1 Enterprises 1
The GSEs’ Secondary Mortgage Market Activities ....................................................................... 2 Transfer 3
Retention of Mortgage Credit Risk, Transfer of Prepayment RiskPrepayment Risk, Retention of Credit Risk .......................................... 5
Liquidity Risk in the Markets for MBSs .......... 2 MBSs Markets and Liquidity Premium Management ............................................................... 54
FHFA’s Conservatorship Priorities for the GSEs .................................................................................................. 76
Directives to Reduce the GSEsEnterprises’ Credit Risks ................................................................... 6 7
Loan-to-Value Ratios and Mortgage Reinsurance Transactions ......................................... 6 7
Guarantee Fees ............................and Loan Level Price Adjustments ............................................................ 7 Credit Risk Transfer Programs ........................ 8
Credit Risk Transfer Programs................................................................................ 98
Standardization Initiatives to Foster MBS Liquidity .............................................................. 11
10 Uniform Mortgage Data Standardization Program ................................................................................. 11
The Common Securitization Platform .... 10 Common Securitization Platform ................................................................................ 12
The ...... 11 Uniform MBS Single Security Initiative .......................................................................... 12 14
Potential Post-Conservatorship Issues for the GSEs Operations ....................................................................................... 15
Heightened Capital Buffer Requirements: The 2020 Capital Rule........... 14 Heightened Capital Buffer Requirements ............................................................................... 1614
The GSEsEnterprises’ Multifamily Business Models ...................................................................... 17 18
Duty to Serve: Manufactured Housing Chattel Loans ............................................................ 19 21

Contacts
Author Information ........................................................................................................................ 21 24

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Fannie Mae and Freddie Mac: Recent Administrative Developments
Introduction
Congress chartered Fannie Mae and Freddie Mac,Congress chartered Fannie Mae and Freddie Mac,1 also known collectively as also known collectively as the government-
sponsored enterprises (GSEs),2Enterprises,1 to promote homeownership by providing liquidity to the to promote homeownership by providing liquidity to the
secondary markets for single-family residential mortgages and multifamily (apartment and secondary markets for single-family residential mortgages and multifamily (apartment and
condominium) mortgages. Guaranteeingcondominium) mortgages. Guaranteeing the credit (default) risk linked to single-family residential mortgages is their core business single-family residential mortgages is their core business
activity. activity. Specifical y, the GSEsSpecifically, the Enterprises retain the credit retain the credit (default) risks from the mortgages they purchase risks from the mortgages they purchase
from loan originators and subsequently issue bond-like instruments known as mortgage-backed from loan originators and subsequently issue bond-like instruments known as mortgage-backed
securities (MBSs).securities (MBSs).32 Investors who purchase the MBSs are guaranteed to get their initial Investors who purchase the MBSs are guaranteed to get their initial principal principal
investment returned, but they assume the risk of declining cash flows if borrowers investment returned, but they assume the risk of declining cash flows if borrowers choose to
repay their mortgages ahead of schedule, repay their mortgages ahead of schedule, knownreferred to as prepayment risk. as prepayment risk.43 Hence, unlike mortgages Hence, unlike mortgages
with both with both attached lendingprepayment and default risks, MBSs are risks, MBSs are arguably considered more liquid (e.g., more liquid (e.g., they can be traded can be traded
or sold for cash more quickly) largely becauseor sold for cash more quickly) largely because they contain only one type of lending risk only one type of lending risk. When
investors hold MBSs, more private-sector funds are channeled toward offering is attached. Thus, MBSs can attract private sector funds that can be used to offer relatively less liquid relatively less
liquid mortgages—namely 30-year fixed-rate mortgages. National mortgage rates tend to mortgages—namely 30-year fixed-rate mortgages. National mortgage rates tend to fal as
fall as the supply of funds in the supply of funds in this the MBS market increases, making market increases, making U.S. homeownership more affordable. homeownership more affordable.
The Federal Housing Finance Agency (FHFA), an independent federal The Federal Housing Finance Agency (FHFA), an independent federal government agency agency
created by the Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289), is the created by the Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289), is the GSEs’
primary supervisor.5Enterprises’ primary regulator.4 FHFA regulates the FHFA regulates the GSEsEnterprises for prudential safety and soundness and ensures for prudential safety and soundness and ensures
they meet their affordable housing mission goals. In September 2008, the they meet their affordable housing mission goals. In September 2008, the GSEsEnterprises experienced experienced
losses that exceeded their statutory minimum capital requirement levels due to the high rate of losses that exceeded their statutory minimum capital requirement levels due to the high rate of
mortgage defaults. At the same time, the mortgage defaults. At the same time, the GSEsEnterprises also experienced losses following spikes in short- also experienced losses following spikes in short-
term borrowing rates that occurred while they were funding long-term assets held in their term borrowing rates that occurred while they were funding long-term assets held in their
portfolios. The portfolios. The GSEsEnterprises subsequently agreed to be placed under conservatorship, meaning that subsequently agreed to be placed under conservatorship, meaning that
FHFA has the powers of management, boards, and shareholders until restoration of the FHFA has the powers of management, boards, and shareholders until restoration of the GSEs’
Enterprises’ financial safety and soundness.financial safety and soundness.6
In addition, the terms in the Senior Preferred Stock Purchase Agreements5 The terms in the senior preferred stock purchase agreements (PSPAs) between the (PSPAs) between the
GSEsEnterprises and the U.S. Treasury stipulate the conditions under which it and the U.S. Treasury stipulate the conditions under which it wil will provide them with provide them with
financial financial support while they are under conservatorship.support while they are under conservatorship.7 The initial PSPAs required the GSEs to

1 For more historical information about the chartering of Fannie Mae and Freddie Mac, see “Why Were Fannie Mae
and Freddie Mac Created?” in CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently
Asked Questions, by Darryl E. Getter.
2 T he term GSEs refers only to Fannie Mae and Freddie Mac in this report. Other entities, 6 The PSPAs have been amended numerous times such that the initial requirement to pay cash 1 Fannie Mae and Freddie Mac are often referred to as government-sponsored enterprises (GSEs). However, entities such as the Federal Home such as the Federal Home
Loan Bank System, are also sometimes referred to as GSEs but are not be included in this discussion.
3Loan Bank System and the Farm Credit System are also GSEs. 2 Fannie Mae calls its securities MBSs, Fannie Mae calls its securities MBSs, and Freddieand Freddie Mac calls its securities participation certificates. Common industry Mac calls its securities participation certificates. Common industry
practice is to refer to practice is to refer to bot hboth Fannie’s MBSs Fannie’s MBSs and Freddie’sand Freddie’s participation certificates participation certificates genericallycollectively as MBSs. as MBSs.
43 In addition to Fannie Mae and In addition to Fannie Mae and Freddie Freddie Mac, CongressMac, Congress created Ginniecreated Ginnie Mae, a federal corporation that guarantees the Mae, a federal corporation that guarantees the
timely repayment of principal and interest to investors in MBSs (created by Ginnietimely repayment of principal and interest to investors in MBSs (created by Ginnie Mae–approved issuers) linked to Mae–approved issuers) linked to
mortgages in whichmortgages in which the default risk has already been guaranteed by federal agencies, suchthe default risk has already been guaranteed by federal agencies, such as the Federal Housing as the Federal Housing
Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Departmen tDepartment of Agriculture of Agriculture
(USDA).(USDA). Hence, GinnieHence, Ginnie Mae doesMae does not retain credit risk. not retain credit risk.
5 4 Prior to FHFA’s creation, Prior to FHFA’s creation, t hethe Office of Federal Housing Office of Federal Housing Enterprise Oversight (OFHEO), which wasEnterprise Oversight (OFHEO), which was an agency under an agency under
the Department of Housing and Urban Developmentthe Department of Housing and Urban Development (HUD), was the safety and soundness(HUD), was the safety and soundness regulator for Fannie Mae regulator for Fannie Mae
and Freddieand Freddie Mac. OFHEO ensuredMac. OFHEO ensured that the that the GSEs Enterprises complied with their statutory capital requirements. complied with their statutory capital requirements. T he GSEsThe Enterprises’ annual ’ annual
housing mission goalshousing mission goals were set by HUD but not by OFHEO. were set by HUD but not by OFHEO.
65 See See FHFA, “Conservatorship,” https://www.fhfa.gov/Conservatorship. FHFA, “Conservatorship,” https://www.fhfa.gov/Conservatorship.
76 P.L. 110-289 gave the P.L. 110-289 gave the Secretary of the T reasuryTreasury Secretary authority to lend or invest in the authority to lend or invest in the GSEs. T he T reasuryEnterprises. The Treasury’s response to ’s response to
the GSEs the Enterprises after they were undercapitalized wasafter they were undercapitalized was similar to its response after the banking system became similar to its response after the banking system became
undercapitalized, in which it purchased preferred shares from the banks via the undercapitalized, in which it purchased preferred shares from the banks via the T roubledTroubled Assets Relief Program. For information, see CRS Report R43413, Costs of Government Interventions in Response to the Financial Crisis: A Retrospective, by Baird Webel and Marc Labonte. Congressional Research Service 1 Fannie Mae and Freddie Mac: Recent Administrative Developments dividends to Treasury has been modified, currently allowing the Enterprises to accumulate the necessary capital reserves to exit conservatorship.7 Congressional interest in the Enterprises Assets Relief Program. For
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pay Treasury a 10% cash dividend on the amount of the outstanding preferred shares, and
dividend payments were suspended for al private GSE stockholders. The GSEs did not have the
option to issue additional stock shares or obtain funds elsewhere if they lacked the cash to make
full dividend payments to Treasury.8 The 10% dividend, therefore, was subsequently replaced
with a “profit sweep” dividend.9 The PSPAs also required the GSEs to reduce the size of their
lending (retained) portfolios to $250 bil ion.10 On September 30, 2019, Treasury further modified
the PSPAs to al ow Fannie Mae and Freddie Mac to retain earnings and accumulate capital
reserves of $25 bil ion and $20 bil ion, respectively.11 On October 28, 2019, FHFA announced a
strategic plan to prepare the GSEs for their eventual exit from conservatorship.12 On January 14,
2021, the PSPAs were again modified to allow Fannie Mae and Freddie Mac to accumulate the
necessary amount of reserves to satisfy the prudential requirements of the 2020 capital rule.13
Congressional interest in the GSEs since they were placed in conservatorship has continued due since they were placed in conservatorship has continued due
to uncertainty in the housing, mortgage, and financial markets. For example, to uncertainty in the housing, mortgage, and financial markets. For example, the final amount and
duration of financial support that Treasury wil eventual y provide the GSEswhether Treasury may have to provide additional financial support to the Enterprises is difficult to predict is difficult to predict. In addition
at present. Furthermore, reforming or replacing the , reforming or replacing the GSEsEnterprises might affect the availability of single- might affect the availability of single-
family 30-year fixed-rate mortgage loan productsfamily 30-year fixed-rate mortgage loan products. This mortgage product is, which are arguably arguably more popular popular
with borrowers, but private lenders may be reluctant to retain them in their lending portfolios
because they are relatively less liquid mortgages—with both credit and prepayment risks
attached—and may last for several decades.14with borrowers (rather than private lenders that are more reluctant to retain the liquidity risks associated with these loans in their lending portfolios).8 Congressional interest has been reflected by various Congressional interest has been reflected by various
draft proposals, draft proposals, bil sbills, and oversight hearings on housing finance reform. For example, H.R. 5549, the End of GSE Conservatorship Preparation Act of 2023, which was introduced during the 118th Congress, would require the Treasury Secretary to submit to Congress completed proposals for the termination of the Enterprises’ conservatorships.9 This report begins with an overview of Fannie Mae’s and Freddie Mac’s secondary mortgage market activities. It then discusses FHFA’s administrative directives pertaining to, and oversight hearings on housing finance reform. During the 116th
Congress, for example, the Senate Committee on Banking, Housing, and Urban Affairs released a
proposal that would affect the GSEs’ role in the housing finance system.15

information, see CRS Report R43413, Costs of Governm ent Interventions in Response to the Financial Crisis: A
Retrospective, by Baird Webel and Marc Labonte.
8 See Don Layton, “Temporarily Ending the GSEs Net Worth Sweep: A Limited but Important Step T owards GSE
Reform,” Joint Center for Housing Studies, October 2, 2019, https://www.jchs.harvard.edu/blog/temporarily-ending-
the-gse-net -worth-sweep-a-limited-but-important-step-towards-gse-reform.
9 See U.S. Department of T reasury, “Treasury Department Ann ounces Further Steps to Expedite Wind Down of Fannie
Mae and Freddie Mac,” press release, August 17, 2012, https://www.treasury.gov/press-center/press-releases/Pages/
tg1684.aspx. Each GSE was allowed to retain a capital buffer of $3 billion. See FHFA, Office of Inspector General,
Analysis of the 2012 Am endm ents to the Senior Preferred Stock Purchase Agreem ents, March 20, 2013,
https://www.fhfaoig.gov/Content/Files/WPR-2013-002_2.pdf.
10 See the third amendment to the GSEs’ PSPAs at https://www.treasury.gov/press-center/press-releases/Documents/
Freddie.Mac.Amendment.pdf and https://www.treasury.gov/press-center/press-releases/Document s/
Fannie.Mae.Amendement.pdf.
11 See U.S. Department of T reasury, “ Treasury Department and FHFA Modify T erms of Preferred Stock Purchase
Agreements for Fannie Mae and Freddie Mac,” press release, September 30, 2019, https://home.treasury.gov/news/
press-releases/sm786.
12 See FHFA, “FHFA Releases New Strategic Plan and Scorecard for Fannie Mae and Freddie Mac,” press release,
October 28, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Releases-New-Strategic-Plan-and-
Scorecard-for-Fannie-Mae-and-Freddie-Mac-.aspx.
13 See FHFA, “ FHFA and T reasury Allow Fannie Mae and Freddie Mac to Continue to Retain Earnings,” press release,
January 14, 2021, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-and-T reasury-Allow-Fannie-Mae-and-
Freddie-Mac-to-Continue-to-Retain-Earnings.aspx. T he 2020 capital rule will be discussed in the section of this report
entitled “Heightened Capital Buffer Requirements: T he 2020 Capital Rule.”
14 See Richard K. Green and Susan M. Wachter, “The American Mortgage in Historical and International Context,”
Journal of Econom ic Perspectives, vol. 19, no. 4 (Fall 2005), pp. 93-114.
15 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, “Chairman Crapo Releases Outline for
Housing Finance Reform,” press release, February 1, 2019, https://www.banking.senate.gov/newsroom/majority/
chairman-crapo-releases-outline-for-housing-finance-reform.
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This report first describes Fannie Mae’s and Freddie Mac’s activities and mission. It then
summarizes FHFA’s conservatorship goals that focus primarily on the management of the the management of the GSEs’
Enterprises’ credit and liquiditycredit and liquidity risks. The report explains various directives issued by FHFA to the GSEs,
which include risks. The directives specifically focus on reducing potential risks that could be borne by U.S. taxpayers, standardizing reducing potential risks that could be borne by U.S. taxpayers, standardizing
numerous processes to foster greater liquidity in the market for their MBSs, and increasing their numerous processes to foster greater liquidity in the market for their MBSs, and increasing their
capital reserves to prepare for their exit from conservatorship. capital reserves to prepare for their exit from conservatorship. Final yFinally, this report discusses , this report discusses some
chal engeshow the the GSEs may face attempting to achieve other mission goals while simultaneously
satisfying their prudential requirements.
The GSEsEnterprises may operate following their conservatorships. Enterprises’ Secondary Mortgage Market Activities
By law, the By law, the GSEsEnterprises cannot originate mortgages directly to borrowers, who obtain their mortgages cannot originate mortgages directly to borrowers, who obtain their mortgages
from loan originators in the primary market. Instead, the from loan originators in the primary market. Instead, the GSEsEnterprises operate in the secondary mortgage operate in the secondary mortgage
market, interacting with loan originators (which market, interacting with loan originators (which sel sell mortgages to the mortgages to the GSEsEnterprises) and investors (which ) and investors (which
purchase the purchase the GSEsEnterprises’ debt and MBS issuances).’ debt and MBS issuances).
In the secondary market, the GSEs The Enterprises interact with MBS investors in both the primary and secondary MBS markets. The Enterprises’ securitization activities, which facilitate the acquisition of funds from the ultimate lenders to mortgage borrowers, are discussed in the sections below. Transfer of Mortgage Prepayment Risk, Retention of Credit Risk In the secondary market, the Enterprises purchase homeowners’ purchase homeowners’ conforming mortgages from loan from loan
originators. Conforming mortgages are single-family mortgages that meet certain eligibility originators. Conforming mortgages are single-family mortgages that meet certain eligibility
criteria set by the criteria set by the GSEsEnterprises based on size and creditworthiness. based on size and creditworthiness.1610 These mortgages must meet These mortgages must meet the Enterprisesthe
GSEs’ underwriting standards and cannot exceed the ’ underwriting standards and cannot exceed the conforming loan limit, which is adjusted , which is adjusted
each year to reflect the changes in the national average home price.17 The GSEs use two methods
to acquire conforming mortgages. A GSE may pay cash (directly from its cash window) to a loan
originator for delivery of a smal number of mortgages. Alternatively, the GSEs may enter into a
swap agreement with a loan originator to purchase a large number (or pool) of mortgages. In
exchange for a pool, the purchasing GSE delivers one (or more) MBS that is linked to the MBS
trust holding the mortgages. An MBS trust is a legal entity established to hold pools of
conforming mortgage loans.18
As borrowers repay their mortgages, the streams of principal and interest are collected by loan
servicers and forwarded to investors in MBSs issued by the GSEs. MBSs are essential y
derivative products that contain one, rather than both, of the financial risks attached to the
original mortgages that the GSE purchased.19 Investors that purchase an MBS receive a coupon,
which is the yield composed of the principal and interest repayments from borrowers whose
mortgages are held in MBS trusts.20 However, various fees are subtracted before the coupons are

16 T hese mortgages tend to have fixed interest rates with a 30-year maturity.
17 T he 2021 maximum conforming loan limit for one-unit properties is $548,250each year to reflect the changes in the national average home prices.11 The Enterprises 7 For more historical information about the chartering of Fannie Mae and Freddie Mac, see “Why Were Fannie Mae and Freddie Mac Created?” in CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions, by Darryl E. Getter. 8 See Richard K. Green and Susan M. Wachter, “The American Mortgage in Historical and International Context,” Journal of Economic Perspectives, vol. 19, no. 4 (Fall 2005), pp. 93-114. 9 H.R. 5549 was introduced in the House and referred to the House Committee on Financial Services. 10 These mortgages tend to have fixed interest rates with a 30-year maturity. 11 FHFA establishes the annual conforming loan limits for one-to-four-unit properties. For most areas in which the median . For most areas in which the median
local house value exceeds the national average house value by 115%, the conforming loan limit is set at 115% of the local house value exceeds the national average house value by 115%, the conforming loan limit is set at 115% of the
median home value. T hus, the conforming loan limit for one-unit properties in most high-cost areas is $822,375 in
2021. T hemedian home value. FHFA establishes separate conforming loan limit for Alaska, Hawaii, conforming loan limit for Alaska, Hawaii, Guam,Guam, and the U.S. Virgin Islands is $822,375 for one-unit
properties. See FHFA, “ FHFA Announces Conforming Loan Limits for 2021,” press release, November 24, 2020,
https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limits-for-2021.aspx.
18 T he MBS trusts are bankruptcy-remote or special-purpose entities, meaning that the parent company (e.g., one of the
GSEs) isolates and holds these assets in the trust rather than on its own balance sheets. If , for example, a parent
company goes bankrupt, then the stipulated activities of a special-purpose entity are not disrupted given that the trust
assets are legally not owned by the parent company. In this case, the assets (mortgages) held in the MBS trusts are
funded by MBS issuances.
19 In finance, a derivative is a financial instrument with value linked to at least one but not all of the risks contained in a
reference bond. In this case, the MBS derivative instruments have the prepayment risk but not the default risk that is
contained in the underlying reference mortgage.
20 For detailed descriptions of loan securitizations and MBS trust guarantees, see Fannie Mae, Basics of Fannie Mae
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paid to investors.21 and the U.S. Virgin Islands. Congressional Research Service 2 Fannie Mae and Freddie Mac: Recent Administrative Developments use two methods to acquire conforming mortgages. An Enterprise may pay cash (directly from its cash window) to a loan originator for delivery of a small number of mortgages. Alternatively, an Enterprise may enter into a swap agreement with a loan originator to purchase a large number (or pool) of mortgages. In exchange for a pool, the purchasing Enterprise delivers one (or more) MBS that is linked to the MBS trust holding the mortgages. An MBS trust is a legal entity established to hold pools of conforming mortgage loans.12 As borrowers repay their mortgages, the streams of principal and interest are collected by loan servicers and forwarded to investors in MBSs issued by the Enterprises. An investor that purchases an MBS receives a coupon, which is the yield composed of the principal and interest repayments from borrowers whose mortgages are held in MBS trusts.13 However, various fees are subtracted before the coupons are paid to investors.14 For example, a designated mortgage servicer retains a fee to collect borrowers’ For example, a designated mortgage servicer retains a fee to collect borrowers’
regular payments, resolves borrower delinquency and default problems, and disburses payments regular payments, resolves borrower delinquency and default problems, and disburses payments
to the to the GSEsEnterprises (which subsequently disburse payments to MBS investors). Other fees related to the (which subsequently disburse payments to MBS investors). Other fees related to the
home purchase (e.g., settlement costs) that borrowers may have chosen not to pay upfront may home purchase (e.g., settlement costs) that borrowers may have chosen not to pay upfront may
also be subtracted. Simply put, the MBS coupon is the rate of return net of fees that an investor also be subtracted. Simply put, the MBS coupon is the rate of return net of fees that an investor
receives for purchasing or investing in an receives for purchasing or investing in an MBS. The Enterprises’ profits are related to lendingMBS.
The GSEs, like banks, are financial intermediaries that match mortgage borrowers with ultimate
lenders. Under a traditional banking model, banks borrow funds from their depositors and use the
funds to originate longer-term consumer and business loans. Consumers and businesses pay
higher interest rates to banks for these longer-term loans than the banks pay to their depositors for
successive sequences of relatively lower-rate loans (e.g., recurring deposits) for shorter periods of
time. General y speaking, profits are calculated as revenues minus costs. Lending spreads—the —the
difference between lending at higher rates and borrowing at successive sequences of shorter difference between lending at higher rates and borrowing at successive sequences of shorter
rates—is a common approach deployed by financial institutions to generate revenues. A bank can
retain al of the revenues generated by its lending spreads if the entire lending process and
associated financial risks are retained on its balance sheet.
Similar to banks, the GSEs create profitable lending spreadsrates—created to finance assets retained in their to finance assets retained in their
lending portfolios (on-balance sheet) and the conforming mortgages held in the MBS trusts (off-lending portfolios (on-balance sheet) and the conforming mortgages held in the MBS trusts (off-
balance sheet). balance sheet). The GSEs For the on-balance-sheet assets retained in their portfolios, the Enterprises issue to investors debt securitiesissue to investors debt securities, —referred to as unsecured referred to as unsecured debentures,
—with shorter maturities relative to the longer-term assetswith shorter maturities relative to the longer-term assets retained in portfolio. By borrowing via . By borrowing via
successive sequences of lower-rate debentures, the successive sequences of lower-rate debentures, the GSEsEnterprises create portfolio lending spreads. create portfolio lending spreads. In
addition,For the off-balance the off-balance -sheet MBS trusts, the Enterprises’ profits are subtracted from lending spreads, which are created as the difference between the longer-term mortgage rates paid by borrowers and the MBS coupons paid to MBS investors.15 In other words, the guarantee fee (g-fee)—the residual following the subtraction of the shorter-term MBS coupons as well as the loan servicing and other ancillary fees from the longer-term borrowers’ mortgage coupons—is the compensation the Enterprises receive for guaranteeing to investors timely payment of the MBS coupons and for retaining the default risks of the mortgages held in the MBS trusts.16 12 The MBS trusts are bankruptcy-remote or special-purpose entities, meaning that the parent company (e.g., one of the Enterprises) isolates and holds these assets in the trust rather than on its own balance sheets. If, for example, a parent company goes bankrupt, then the stipulated activities of a special-purpose entity are not disrupted given that the trust assets are legally not owned by the parent company. In this case, the assets (mortgages) held in the MBS trusts are funded by MBS issuances. 13 For detailed descriptions of loan securitizations and MBS trust guarantees, see Fannie Mae, Basics of Fannie Mae Single-Family MBS, January 2019, http://www.fanniemae.com/resources/file/mbs/pdf/basics-sf-mbs.pdf. 14 For example, if the average interest rate of the underlying pool of mortgages is 4% or 400 basis points, an Enterprise may retain an average of 56 basis points and pass the remaining 344 basis points to the MBS holders after subtracting additional basis points for mortgage servicers (typically 25 basis points) and paying for other costs to originate the loan. See FHFA, “FHFA Issues 2017 Report to Congress on Guarantee Fees,” press release, December 10, 2018, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Issues-2017-Report-to-Congress-on-Guarantee-Fees.aspx. 15 For more information on the pricing of single-family mortgages—specifically how mortgage coupons paid by borrowers are calculated—see CRS Report R46980, Single-Family Mortgage Pricing and Primary Market Policy Issues, by Darryl E. Getter. 16 The Enterprises, therefore, are monoline insurance companies. See sheet MBS trusts are funded with the GSEs’ issuances of MBSs in the
to-be-announced (TBA) market.22 Mortgage borrowers in the primary market pay the longer-term
rates, consisting of the MBS coupons prior to any subtraction of fees. The GSEs subsequently
pass along to investors the shorter rates—the successive sequences of MBS coupons net of fees—
compensating them for providing the principal funds for the mortgages and retaining only the
prepayment risk. The difference between the longer-term and shorter-term rates (minus loan
servicing and other ancil ary fees) are the GSEs’ compensation for retaining only the credit risks
of the original mortgages held in trust, essential y making them monoline bond insurers.23 These
concepts, which are key to understanding the GSEs’ securitization activities, are described in
further detail in the sections below.

Single-Fam ily MBS, January 2019, http://www.fanniemae.com/resources/file/mbs/pdf/basics-sf-mbs.pdf.
21 For example, if the average interest rate of the underlying pool of mortgages is 4% or 400 basis poin ts, a GSE may
retain an average of 56 basis points and pass the remaining 344 basis points to the MBS holders after subtracting
additional basis points for mortgage servicers (typically 25 basis points) and paying for other costs to originate the loan.
See FHFA, “ FHFA Issues 2017 Report to Congress on Guarantee Fees,” news release, December, 10, 2018,
https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Issues-2017-Report -to-Congress-on-Guarantee-Fees.aspx.
22 Ginnie Mae facilitates MBSs that it issues in the T BA market. Ginnie Mae transfers prepayment risk in a similar
manner as the GSEs, but it does not retain default risk. T he default risk is retained by the federal agencies—FHA, VA,
and USDA—that provide mortgage insurance.
23 See FHFA, “Enterprise Capital Requirements,” 83FHFA, “Enterprise Capital Requirements,” 83 Federal Register 137, July 137, July 17, 2018. Bond insurers guarantee (for 17, 2018. Bond insurers guarantee (for
a fee) that the interest payment streams generated from a bond (or loan) willa fee) that the interest payment streams generated from a bond (or loan) will be be made on time andmade on time and that, if a default occurs, , if a default occurs,
the initial principal investment will be returned the initial principal investment will be returned to investors. Likewise, the GSEs facilitate the equivalent transaction on
a larger scale via a process referred to as securitization.(continued...)
Congressional Research Service Congressional Research Service

43 Fannie Mae and Freddie Mac: Recent Administrative Developments The Enterprises’ securitization process, therefore, entails detaching two specific mortgage risks—the risk of repaying early and the risk of repaying late (or not at all)—into separate components. Prepayment

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Retention of Mortgage Credit Risk, Transfer of Prepayment Risk
A GSE is compensated for retaining credit risk, the risk that borrowers might default or fail to
repay their mortgage loan obligations, by charging a guarantee fee (or “g-fee”). A g-fee is
deducted from the streams of principal and interest payments before an MBS investor receives a
coupon payment. Although the g-fee is typical y charged to loan originators (and frequently
passed onto borrowers), the benefit of the mortgage guarantee accrues to MBS investors.24 Should
a delinquency or default occur, the GSEs guarantee timely payment of the coupon (net of fees) to
MBS investors.25 After a borrower defaults, the applicable GSE risk, the risk that borrowers will repay their mortgages ahead of schedule, results in lower revenues. For example, if mortgage rates decline, some borrowers may repay their existing mortgages early by refinancing (replacing) them into new mortgages with lower rates. Borrowers also prepay their mortgages when they move. In this case, the Enterprises pass on the repayment of principal but reduce the investors’ MBS coupons by the amount of interest forgone.17 The Enterprises retain the credit (default) risk, the risk that the mortgage obligation will not be repaid, and charges g-fees. Should a delinquency or default occur, the applicable Enterprise purchases the defaulted mortgage purchases the defaulted mortgage
(for the amount of the remaining balance owed) out of the MBS trust.(for the amount of the remaining balance owed) out of the MBS trust. The18 After a borrower defaults, the purchase effectively purchase effectively
reimburses the associated MBS trust and, therefore, prevents MBS investors from losing their reimburses the associated MBS trust and, therefore, prevents MBS investors from losing their
initial initial principal investments. The MBS coupon is subsequently adjusted for the reduced stream of principal investments. The MBS coupon is subsequently adjusted for the reduced stream of
interest payments, thus making it appear to investors that mortgage obligations have been repaid interest payments, thus making it appear to investors that mortgage obligations have been repaid
ahead of schedule (rather than defaulted).
The other key mortgage risk, prepayment risk, is transferred from the GSEs to MBS investors.
Prepayment risk is the risk that borrowers wil repay their mortgages ahead of schedule, resulting
in lenders earning less interest revenue than initial y anticipated. For example, if mortgage rates
decline, some borrowers may repay their existing mortgages early by refinancing (replacing)
them into new mortgages with lower rates. Borrowers also prepay their mortgages when they
move. In this case, the GSEs pass on the repayment of principal but reduce the investors’ MBS
coupons by the amount of interest forgone.26
In sum, the GSEs’ securitization process entails detaching two mortgage risks into separate
components.27 The GSEs retain the default risk component and charges g-fees, but they transfer
the prepayment risk component to MBS investors. For this reason, MBSs can be considered
derivative securities because they contain only one of the risks linked to the original underlying
mortgages held in the MBS trusts.28
Liquidity Risk in the Markets for MBSs
Many types of bonds and other securitiesahead of schedule (rather than defaulted). MBSs, therefore, are conceptually equivalent to derivative products that contain one, rather than both, of the financial risks attached to the original mortgages that the Enterprise purchased.19 MBSs Markets and Liquidity Premium Management In the secondary mortgage market, the Enterprises acquire existing mortgages, which are used to subsequently create new MBSs for issue in the primary MBS market. In other words, the Enterprises deliver new MBSs to investors in the primary MBS market, otherwise referred to as the to-be-announced (TBA) market, via swap agreements.20 The TBA market is a forward market, meaning that a swap agreement to simultaneously sell a pool of mortgages to an Enterprise and purchase MBSs linked to the underlying pool occurs in advance of the MBS securities’ delivery and settlement date. Interest rates—and, therefore, bid-ask spread movements—may occur over the gap period between entering and settlement of a swap agreement.21 Investors wanting to hedge against adverse bid-ask movements prior to delivery of their MBS purchases may require higher compensation (e.g., hedging fees, premiums) to cover the possibility of adverse price movements that could cause the securities to become less liquid prior to the settlement date. These costs may be passed to homeowners, particularly those willing to lock in their mortgage rates over the period of time until their closing settlement dates. Following TBA market issuance, the Enterprises’ MBSs—just like other types of bonds and securities—can subsequently trade directly (via broker-dealers) between two parties trade directly (via broker-dealers) between two parties
in what are referred to as over-the-counter (OTC) market transactions.29 Bonds generally trade
infrequently, and the trade sizes vary, which may cause valuation (pricing) chal enges—
sometimes leading investors and market-makers to perceive that the bonds may be illiquid.30

24 In 2017, the average single-family guarantee fee was 56 basis points. See FHFA, “FHFA Issues 2017 Report to
Congress on Guarantee Fees.”
25 T he GSEs define default as 120 days late.
26 T he process when borrowers prepay mortgages that underlie Ginnie Mae MBSs is similar.
27 For more on default and prepayment risk, see CRS In Focus IF10993, Consumer Credit Markets and Loan Pricing:
The Basics, by Darryl E. Getter.
28 T he Commodities Futures T rading Commission and the Securities and Exchange Commission generally do not
regulate derivatives agreements, contracts, or transactions linked to underlying mortgages assets as they do for other
types of derivatives. For more information on derivatives generally, see CRS In Focus IF10117, Introduction to
Financial Services: Derivatives, by Rena S. Miller.
29 See Financial Industry Regulatory Authority, “Unraveling the Mystery of Over -the-Counter T rading,” The Alert
Investor, January 4, 2016, https://www.finra.org/investors/unraveling-mystery-over-counter-trading.
30 T he increase in electronic trading has increased price transparency in many OT C markets. See Randall Dodd,
Markets: Exchange or Over-the-Counter, International Monetary Fund, https://www.imf.org/external/pubs/ft/fandd/
basics/markets.htm.
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Il iquid securities in what are to the bondholder. Likewise, the Enterprises facilitate the equivalent transaction on a larger scale, referring to the process as securitization. 17 The process when borrowers prepay mortgages that underlie Ginnie Mae MBSs is similar. 18 The Enterprises define default as 120 days late. 19 In finance, a derivative is a financial instrument with value linked to at least one but not all of the risks contained in a reference bond. In this case, the MBS derivative instruments have the prepayment risk but not the default risk that is contained in the underlying reference mortgage. 20 Ginnie Mae facilitates MBSs that it issues in the TBA market. Ginnie Mae transfers prepayment risk in a similar manner as the Enterprises, but it does not retain default risk. The default risk is retained by the federal agencies—FHA, VA, and USDA—that provide mortgage insurance. 21 For example, following a decline in mortgage rates during the COVID-19 pandemic, mortgage pools scheduled for delivery experienced an increase in prepayment risk, thereby reducing their liquidity. The liquidity loss was reflected by a widening gap between the present value of the mortgage pool and the future MBS prices at settlement. See Jiakai Chen et al., Dealers and the Dealer of Last Resort: Evidence from the MBS Markets in the COVID-19 Crisis, Federal Reserve Bank of New York, July 2020, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr933.pdf. Congressional Research Service 4 Fannie Mae and Freddie Mac: Recent Administrative Developments referred to as over-the-counter (OTC) market or secondary securities market transactions.22 Secondary bond markets are typically thin, meaning that bonds generally trade infrequently, and the trade sizes vary, which may cause valuation (pricing) challenges—sometimes leading investors and market-makers to perceive that the bonds may be illiquid.23 Illiquid securities cannot easily be converted into cash or traded within a reasonable time—that is, cannot easily be converted into cash or traded within a reasonable time—that is,
without affecting their quoted prices. Investors arguably might offer (bid) “too much” to buy or without affecting their quoted prices. Investors arguably might offer (bid) “too much” to buy or
sel sell (ask) for a price “too low” when trading (ask) for a price “too low” when trading il iquidilliquid securities. Consequently, investors require securities. Consequently, investors require
additional compensation, referred to as a additional compensation, referred to as a liquidity premium, to buy or , to buy or sel il iquid securities.31
Widening bid-sell illiquid securities.24 Widening bid-ask spreads might signal the emergence of a liquidity premium being incorporated ask spreads might signal the emergence of a liquidity premium being incorporated
in securities in securities prices.25 Likewise, liquidity premiums can also emerge when MBSs trade in the OTC (i.e., secondary) MBS market. Persistent liquidity premiums may result in higher mortgage rates for future homeowners if investors demand higher yields (i.e., higher coupons) to offset the risk that future sales of their MBSs would occur at prices considered “too low” due to market illiquidity.26 Prior to conservatorship, the Enterprises could actively trade their own MBSs in the secondary OTC market to facilitate liquidity.27 By conducting OTC market trades when the bid-ask spreads for MBS widened, the Enterprises could abate rising liquidity premiums and reduce mortgage costs for borrowers.28 Hence, high-volume trading by the Enterprises facilitated narrower bid-ask MBS spreads and hedging fees in both the OTC and TBA markets, respectively.29 (The Enterprises held their own MBSs to show incentive alignment with investors, meaning the Enterprises were willing to hold the same risks that they were selling.30) Thus, despite intermittent episodes of budding liquidity premiums, MBSs issued by the Enterprises were considered to be almost as liquid as U.S. Treasury bonds.31 The current $250 billion cap on the Enterprises’ asset portfolios (resulting from the PSPAs) may limit their ability to buy and sell MBSs at the volumes necessary to influence market pricing. 22 See Financial Industry Regulatory Authority, “Unraveling the Mystery of Over-the-Counter Trading,” The Alert Investor, January 4, 2016, https://www.finra.org/investors/unraveling-mystery-over-counter-trading. 23 The increase in electronic trading has increased price transparency in many OTC markets. See Randall Dodd, “Markets: Exchange or Over-the-Counter,” International Monetary Fund, https://www.imf.org/external/pubs/ft/fandd/basics/markets.htm. 24 See Douglas J. Elliott, “prices.32
The TBA market is a forward market, meaning a swap agreement to simultaneously sel a pool of
mortgages to one of the GSEs and purchase MBSs linked to the underlying pool occurs in
advance of the securities’ delivery and settlement date. Interest rates and, therefore, bid-ask
spread movements may occur over the gap period between entering and settlement of a swap
agreement.33 Investors wanting to hedge against adverse bid-ask movements prior to delivery of
their MBS purchases may require higher compensation (e.g., hedging fees, premiums) to cover
the possibility of adverse price movements that could cause the securities to become less liquid
prior to the settlement date. These costs may be passed to homeowners, particularly those wil ing
to lock in their mortgage rates over the period of time until their closing settlement dates.
Following TBA market issuance, the GSEs’ MBSs subsequently trade in the OTC market, where
liquidity premiums can also emerge. Persistent liquidity premiums may result in higher mortgage
rates for future homeowners if investors demand higher yields (i.e., higher coupons) to offset the
risk that future sales of their MBSs would occur at prices considered “too low” due to market
il iquidity.34
Despite intermittent episodes of budding liquidity premiums, MBSs issued by the GSEs are
considered to be almost as liquid as U.S. Treasury bonds.35 Prior to conservatorship, the GSEs
could actively trade their own MBSs in the OTC market to facilitate liquidity.36 By conducting
OTC market trades when the bid-ask spreads for MBS widened, the GSEs could abate rising
liquidity premiums and reduce mortgage costs for borrowers.37 Hence, high-volume trading by
the GSEs facilitated narrower bid-ask MBS spreads and hedging fees in both the OTC and TBA

31 See Douglas J. Elliott, Market Liquidity: A Primer,,” Brookings Institution, June 2015, https://www.brookings.edu/wp- Brookings Institution, June 2015, https://www.brookings.edu/wp-
content/uploads/2016/07/Market-Liquidity.pdf. content/uploads/2016/07/Market-Liquidity.pdf.
3225 See See Rich Podjasek et al., Rich Podjasek et al., “Has MBS Market Liquidity Deteriorated?,,” Federal Reserve Bank of New Federal Reserve Bank of New York, February 8, York, February 8,
2016, https://libertystreeteconomics.newyorkfed.org/2016/02/has-mbs-market-liquidity-deteriorated.html. 2016, https://libertystreeteconomics.newyorkfed.org/2016/02/has-mbs-market-liquidity-deteriorated.html.
33 For example, following a decline in mortgage rates during the COVID-19 pandemic, mortgage pools scheduled for
delivery experienced an increase in prepayment risk, thereby reducing their liquidity. T he liquidity loss was reflected
by a widening gap between the present value of the mortgage pool and the future MBS pric es at settlement. See Jiakai
Chen et al., Dealers and the Dealer of Last Resort: Evidence from the MBS Markets in the COVID -19 Crisis, Federal
Reserve Bank of New York, July 2020, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/
sr933.pdf.
3426 Whether investors found MBSs Whether investors found MBSs attractive due to their lack of credit risk or their attractive due to their lack of credit risk or their OT COTC market liquidity is market liquidity is subject to subject to
debate. Seedebate. See James Vickery and JoshuaJames Vickery and Joshua Wright, Wright, TBA Trading and Liquidity in the Agency MBS Market, Federal, Federal Reserve Reserve
Bank of NewBank of New York, May 2013, http://www.newyorkfed.org/research/epr/2013/1212vick.pdf. York, May 2013, http://www.newyorkfed.org/research/epr/2013/1212vick.pdf.
35 See Karan Kaul and Laurie Goodman, Declining Agency MBS Liquidity Is Not All about Financial Regulation ,
Urban Institute, November 2015, https://www.urban.org/sites/default/files/publication/72621/2000503-Declining-
Agency-MBS-Liquidity-Is-Not -All-about-Financial-Regulation.pdf.
36 See 27 See Scott Richardson and Diogo Palhares, “(Il)liquidity Premium in Credit Markets: A Myth?,” Scott Richardson and Diogo Palhares, “(Il)liquidity Premium in Credit Markets: A Myth?,” Journal of Fixed
Incom eIncome, vol. 28, no. 3 (Winter 2019), pp. 3-21. , vol. 28, no. 3 (Winter 2019), pp. 3-21.
3728 See See Congressional BudgetCongressional Budget Office, Office, Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage
Market, December 2010, https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/12-23-, December 2010, https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/12-23-
fanniefreddie.pdf. fanniefreddie.pdf.
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markets, respectively.38 (The GSEs held their own MBSs to show incentive alignment with
investors, meaning the GSEs were wil ing to hold the same risks that they were sel ing.39)
The current $250 bil ion cap on the GSEs’ asset portfolios (resulting from the PSPAs) may limit
their ability to buy and sel MBSs at the volumes necessary to influence market pricing. Although
the Federal Reserve has purchased large amounts of the GSEs29 See Karan Kaul, “The Past, Present and Future of Agency MBS Liquidity,” prepared for Ginnie Mae by State Street Global Advisors and the Urban Institute’s Housing Finance Policy Center, October 2016, https://www.ginniemae.gov/newsroom/publications/Documents/agency_mbs_liquidity.pdf. 30 See Robert Van Order, “Government-Sponsored Enterprises and Resource Allocation: Some Implications for Urban Economics,” in Brookings-Wharton Papers on Urban Affairs, ed. Gary Burtless and Janet Rothenberg Pack (Washington, DC: Brookings Institution, 2007), pp. 151-203. 31 See Karan Kaul and Laurie Goodman, “Declining Agency MBS Liquidity Is Not All About Financial Regulation,” Urban Institute, November 2015, https://www.urban.org/sites/default/files/publication/72621/2000503-Declining-Agency-MBS-Liquidity-Is-Not-All-about-Financial-Regulation.pdf. Congressional Research Service 5 Fannie Mae and Freddie Mac: Recent Administrative Developments Although the Federal Reserve has purchased large amounts of the Enterprises’ MBS while carrying out its lender-’ MBS while carrying out its lender-
of-last-resort responsibilities, it has largely retained them in its asset portfolio rather than actively of-last-resort responsibilities, it has largely retained them in its asset portfolio rather than actively
trading them.trading them.4032 Hence, less active trading of MBSs by the Hence, less active trading of MBSs by the GSEsEnterprises and more holding (rather than and more holding (rather than
actively trading) of MBSs by the Federal Reserve might explain declines in market liquidity actively trading) of MBSs by the Federal Reserve might explain declines in market liquidity
observed prior to the observed prior to the Coronavirus Disease 2019 (COVID-19)COVID-19 pandemic. pandemic.41
33 FHFA’s Conservatorship Priorities for the GSEs
Since conservatorship, FHFA has released various versions of strategic plans and performance Since conservatorship, FHFA has released various versions of strategic plans and performance
goals.goals.4234 FHFA has focused primarily on (1) reducing the credit risks (which pose a direct risk to FHFA has focused primarily on (1) reducing the credit risks (which pose a direct risk to
U.S. taxpayers) retained by the U.S. taxpayers) retained by the GSEsEnterprises and (2) increasing the liquidity of their MBS issuances. The and (2) increasing the liquidity of their MBS issuances. The
directives that focus on those risks are highlighted in this section. directives that focus on those risks are highlighted in this section.
Directives to Reduce the GSEs’ Credit Risks
As mentioned, the PSPAs require the GSEs to pay dividends to the U.S. Treasury in exchange for
its financial support while they are under conservatorship. The PSPAs also require the GSEs to
Enterprises’ Credit Risks The PSPAs required the Enterprises to reduce taxpayers’ credit risk. reduce taxpayers’ credit risk. The variousVarious programs to facilitate the programs to facilitate the GSEsEnterprises’ credit ’ credit risksrisk management are are
discussed in this section. discussed in this section.
Loan-to-Value Ratios and Mortgage Reinsurance Transactions
By statute, additional credit risk reduction measures are required if the By statute, additional credit risk reduction measures are required if the GSEsEnterprises purchase mortgages purchase mortgages
with loan-to-value ratios (LTVs) above 80%, meaning that the mortgage balance exceeds 80% of with loan-to-value ratios (LTVs) above 80%, meaning that the mortgage balance exceeds 80% of
the residential property value.the residential property value.4335 If a borrower defaults, the If a borrower defaults, the GSE general y Enterprise generally recovers losses by recovers losses by
foreclosing (repossessing) and then liquidating (foreclosing (repossessing) and then liquidating (sel ingselling) the property. If a repossessed property ) the property. If a repossessed property
sel ssells for at least 80% of its original for at least 80% of its original value, then the 80% LTV requirement increases the likelihood value, then the 80% LTV requirement increases the likelihood
that a GSEthat an Enterprise would recover enough proceeds to cover the remaining would recover enough proceeds to cover the remaining mortgage balance.36 Mortgage insurance is used when borrowers lack the funds to make down payments that would bring their LTVs to 80% or lower.37 Borrowers can purchase private mortgage insurance, which would assume the first 20% (or more in some cases) of losses associated with a mortgage default.38 32 See mortgage balance.44

38 See Karan Kaul, The Past, Present and Future of Agency MBS Liquidity, prepared for Ginnie Mae by State Street
Global Advisors and the Urban Institute’s Housing Finance Policy Center, October 2016, https://www.ginniemae.gov/
newsroom/publications/Documents/agency_mbs_liquidity.pdf.
39 See Robert Van Order, “Government -Sponsored Enterprises and Resource Allocation: Some Implications for Urban
Economics,” in Brookings-Wharton Papers on Urban Affairs, ed. Gary Burtless and Janet Rothenberg Pack
(Washington, DC: Brookings Institution, 2007), pp. 151-203.
40 See Board of Governors of the Federal Reserve System, “Authority to Lend to Fannie Mae and FreddieBoard of Governors of the Federal Reserve System, “Authority to Lend to Fannie Mae and Freddie Mac,” press Mac,” press
release, July 13, 2008, http://www.federalreserve.gov/newsevents/press/other/20080713a.htm. release, July 13, 2008, http://www.federalreserve.gov/newsevents/press/other/20080713a.htm.
4133 Kaul and Kaul and Goodman, Goodman, “Declining Agency MBS Liquidity Is Not All about Financial Regulation .
42.” 34 FHFA issues FHFA issues annual annual scorecards, which communicate the annual priorities and expectations that it sets for the , which communicate the annual priorities and expectations that it sets for the GSEs
Enterprises with respect to both of their single-family and multifamily mortgage businesseswith respect to both of their single-family and multifamily mortgage businesses while while under conservatorship.under conservatorship. See See
FHFA, “Conservatorship.” FHFA, “Conservatorship.”
43 35 12 U.S.C. 12 U.S.C. §1717. §1717.
44 T he36 The property value would property value would have been determined by an appraisal when the mortgage washave been determined by an appraisal when the mortgage was originated. Property values, originated. Property values,
however, are not constant and might increase or decrease by the time a borrower officially defaults. however, are not constant and might increase or decrease by the time a borrower officially defaults. T he GSEsThe Enterprises’ ’
definition of definition of default is 120 days delinquent. A loss is 120 days delinquent. A loss mitigation or workout option may be able to resolve a default if the mitigation or workout option may be able to resolve a default if the
property’s value exceeds the outstanding mortgage balance. If the property value falls belowproperty’s value exceeds the outstanding mortgage balance. If the property value falls below the outstanding mortgage the outstanding mortgage
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Mortgage insurance is typical y used when a borrower lacks the funds to make a down payment
that would bring the LTV to 80% or lower.45 A borrower can purchase private mortgage
insurance, which would assume the first 20% (or more in some cases) of losses associated with a
mortgage default.46
The GSEsbalance, the likelihood that a loss mitigation option will succeed diminishes. 37 Certain borrowers may also qualify to obtain federal mortgage insurance from the FHA, VA, or USDA. Because federally insured mortgages are backed by the full faith and credit of the U.S. government, the Enterprises face no counterparty credit risk when borrowers choose this option. Another option for borrowers may be to obtain a junior (second) loan for some or all of the 20% down payment requirement. After the property is liquidated in a foreclosure sale, the recovered proceeds would be distributed first to the Enterprises. The junior lender would receive any proceeds left over to cover the unpaid portion of the junior loan. Given that foreclosure costs can be substantial, the mortgage insurer or second lender faces a greater possibility of little or no recoupment of loan proceeds. 38 According to FHFA, mortgage insurers represent the largest counterparty exposure for the Enterprises. See FHFA, (continued...) Congressional Research Service 6 Fannie Mae and Freddie Mac: Recent Administrative Developments The Enterprises introduced additional methods to facilitate the transfer of credit risk stemming from introduced additional methods to facilitate the transfer of credit risk stemming from
low-down-payment borrowers referred to as low-down-payment borrowers referred to as mortgage reinsurance transactions. In their pilot . In their pilot
programs, the programs, the GSEs initial y payEnterprises initially paid the mortgage insurance premiums upfront and the mortgage insurance premiums upfront and are were reimbursed reimbursed
later by borrowers via interest rate adjustments on their loans, thus streamlining the origination later by borrowers via interest rate adjustments on their loans, thus streamlining the origination
process for some borrowers process for some borrowers who would need to obtain some formin need of private mortgage insurance. of private mortgage insurance.
Fannie MaeFannie Mae cal s its program’s pilot program, the Enterprise-Paid Mortgage Insurance Option, and Freddie Mac the Enterprise-Paid Mortgage Insurance Option, and Freddie Mac
cal s its’s pilot program program , Integrated Mortgage Insurance, ended in June 2021.39 Guarantee Fees and Loan Level Price Adjustments As previously discussed, the Enterprises’ revenues are generated by g-fees, which can be set to target returns by lines of business, cover potential credit losses, and mitigate losses to taxpayers.40 G-fees are established at the same time when the interest rates for single-family mortgages are determined.41 Specifically, a loan originator typically receives a rate sheet from Fannie Mae or Freddie Mac with a designated minimum base mortgage rate and the various risk adjustments, referred to as the loan-level price adjustments (LLPAs), which are subsequently added to the base rate. After gathering a mortgage applicant’s credit score and down payment amount, the loan originator goes to the LLPA matrixes to locate the corresponding fees that are added to the base rate. Borrowers with low default risk characteristics generally pay lower LLPAs compared to those with high default risk characteristics. The higher LLPAs are structured to compensate for elevated levels of default risk attributed to high-risk borrowers. For loans such as a cash-out refinances or investment properties, which may be associated with higher default risk or are not directly related to the policy goal of increasing homeownership, respectively, additional LLPA fees may be attached. On January 19, 2023, FHFA directed the Enterprises to alter their g-fee schedules as part of the strategic plan to improve their financial conditions.42 Under the new LLPA fee structure, most prospective borrowers pay higher LLPAs. All borrowers with low default risk characteristics will continue to pay lower LLPAs compared to those with high default risk characteristics.43 The increase in g-fee revenues may expedite the Enterprises’ ability to accumulate more retained earnings necessary to exit conservatorship. The Enterprises’ g-fees can be separated into two components. First, the upfront g-fee is determined by the borrower’s risk characteristics (e.g., credit score, LTV). Second, the ongoing g-fee, which is collected each month over the life of the loan, is determined by the product type (e.g., fixed rate, adjustable). In December 2011, Congress directed the Enterprises to increase their ongoing g-fees for all loans by 10 basis points (or 0.1% given that a single basis point is Office of the Inspector General, Enterprise Counterparties: Mortgage Insurers, February 16, 2018, Integrated Mortgage Insurance.47
Guarantee Fees
The GSEs can generate revenues to cover potential credit losses by increasing g-fees, thus
mitigating losses to taxpayers. The GSEs have two types of g-fees. First, the upfront g-fee is
determined by the borrower’s risk characteristics (e.g., credit score, LTV). Second, the ongoing g-
fee, which is collected each month over the life of the loan, is determined by the product type
(e.g., fixed rate, adjustable). In December 2011, Congress directed FHFA to increase the ongoing
g-fees for al loans by 10 basis points (or 0.1% given that a single basis point is equal to 1/100 of
a percent; 100 basis points is 1%).48 The increase took effect on December 1, 2012, for loans
exchanged for MBSs.49 FHFA also increased g-fees in 2013.50 In 2019, FHFA reported an average
g-fee of 56 basis points for al loans. The upfront portion of the g-fee (based on the credit risk
attributes of borrowers) averaged 13 basis points, while the ongoing portion—based upon the
type (e.g., fixed rate or adjustable rate) and loan terms—averaged 43 basis points. The average g-
fee in 2019 for the 30-year fixed rate and 15-year fixed rate mortgages averaged 58 and 36 basis
points, respectively.51

balance, the likelihood that a loss mitigation option will succeed diminishes.
45 Certain borrowers may also qualify to obtain federal mortgage insurance from the FHA, VA, or USDA. Because
federally insured mortgages are backed by the full faith and credit of the U.S. government, the GSEs face no
counterparty credit risk when borrowers cho ose this option. Another option for borrowers may be to obtain a junior
(second) loan for some or all of the 20% down payment requirement. After the property is liquidated in a foreclosure
sale, the recovered proceeds would be distributed first to the GSE. T he junior lender would receive any proceeds
leftover to cover the unpaid portion of the junior loan. Given that foreclosure costs can be substantial, the mortgage
insurer or second lender faces a greater possibility of a small or no recoupment of loan proceeds.
46 According to FHFA, mortgage insurers represent the largest counterparty exposure for the GSEs. See FHFA, Office
of Inspector General, Enterprise Counterparties: Mortgage Insurers, February 16, 2018, https://www.fhfaoig.gov/https://www.fhfaoig.gov/
Content/Files/WPR-2018-002.pdf. Content/Files/WPR-2018-002.pdf.
4739 See See FHFA, Office of FHFA, Office of the Inspector General, Inspector General, Freddie Mac’s IMAGIN PilotEnterprise Counterparties: Reinsurers, September , September 12, 201827, 2021, ,
https://www.fhfaoig.gov/sites/default/files/WPR-https://www.fhfaoig.gov/sites/default/files/WPR-2018-005.pdf; and Rob Schaefer, “ Fannie Mae’s Enterprise-Paid
Mortgage Insurance Option,” Fannie Mae, July 10, 2018, http://www.fanniemae.com/portal/research-insights/
perspectives/enterprise-paid-mortgage-insurance-schaefer-071018.html.
48 T emporary Payroll T ax Cut Continuation Act of 2011 (P.L. 112-78).
49 See FHFA, “FHFA Announces Increase in Guarantee Fees,” press release, August 31, 20122021-007.pdf. 40 See Edward Golding et al., “How to Think About Fannie Mae and Freddie Mac’s Pricing,” Urban Institute, August 2023, https://www.urban.org/research/publication/how-think-about-fannie-mae-and-freddie-macs-pricing. 41 See CRS Report R46980, Single-Family Mortgage Pricing and Primary Market Policy Issues, by Darryl E. Getter. 42 FHFA, “FHFA Announces Updates to the Enterprises’ Single-Family Pricing Framework,” press release, January 19, 2023, https://www.fhfa.gov/news/news-release/fhfa-announces-updates-to-the-enterprises-single-family-pricing-framework. 43 A category of prospective high-risk borrowers will pay slightly lower LLPAs compared to the previous LLPA fee structure. Although slightly lower premiums for this group may potentially may increase affordability and promote more stable payment behavior, the anticipated revenues generated may not be large given that fewer high-risk borrowers can qualify for as many mortgages or for those as large as those obtained by low-risk borrowers. Congressional Research Service 7 link to page 20 link to page 20 Fannie Mae and Freddie Mac: Recent Administrative Developments equal to 1/100 of a percent—100 basis points is 1%), which took effect on December 1, 2012, for loans exchanged for MBSs.44 In November 2021, Congress extended the 10-basis-point ongoing g-fee until 2032.45 These risk characteristics and other requirements are factors taken into account when charging g-fees.46 Credit Risk Transfer Programs In July 2013, the Enterprises, https://www.fhfa.gov/
Media/PublicAffairs/Pages/FHFA-Announces-Increase-in-Guarantee-Fees.aspx.
50 See FHFA, Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2017, December 10, 2018,
https://www.fhfa.gov/AboutUs/Reports/Pages/Fannie-Mae-and-Freddie-Mac-Single-Family-Guarantee-Fees-in-
2017.aspx.
51 T he average upfront component was 15 basis points, and the average ongoing component was 41 basis points. See
FHFA, Fannie Mae and Freddie Mac Single-Fam ily Guarantee Fees in 2019, December 2020, https://www.fhfa.gov/
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link to page 21

Credit Risk Transfer Programs
In July 2013, the GSEs initiated new credit risk transfer (CRT) programs to share a portion of the initiated new credit risk transfer (CRT) programs to share a portion of the
credit risk linked to their guaranteed single-family mortgages with the private sector.credit risk linked to their guaranteed single-family mortgages with the private sector.5247 Both Both GSEs
Enterprises now offer now offer a set of CRT financial instruments that are linked only to the CRT financial instruments that are linked only to the credit risk of the single- of the single-
family mortgages held in the MBS trusts.family mortgages held in the MBS trusts.5348 Investors preferring exposure only to mortgage Investors preferring exposure only to mortgage
prepayment risk may continue to purchase MBSs, but the private sector may now purchase CRT may continue to purchase MBSs, but the private sector may now purchase CRT
issuances to earn revenue in exchange for assuming exposure to the credit risk. issuances to earn revenue in exchange for assuming exposure to the credit risk.
Fannie Mae’s CRT instruments are known as Connecticut Avenue Securities (CAS); Freddie
Mac’s CRT instruments are known as Structural Agency Credit Risk (STACR). The GSEs
The Enterprises transfer to investors the credit risk linked to mortgages with LTVs transfer to investors the credit risk linked to mortgages with LTVs greater than 60% (or than 60% (or
borrowers with 40% or less in accumulated home equity, making them more vulnerable to the borrowers with 40% or less in accumulated home equity, making them more vulnerable to the
possibility of owing more than the initialpossibility of owing more than the initial value of their homes if housing market prices were to value of their homes if housing market prices were to
fal ).54fall).49 After defaults occur, the After defaults occur, the GSEsEnterprises write down the coupons paid to CRT investors (similar to write down the coupons paid to CRT investors (similar to
writing down the coupons on MBSsadjusting the MBS coupons downward after prepayments occur). after prepayments occur).50 The The GSEs Enterprises retain the credit risk for retain the credit risk for
mortgages with mortgages with lower LTVs (or borrowers with 41% or more in accumulated home equity such LTVs (or borrowers with 41% or more in accumulated home equity such
that their outstanding balances are significantly below the value of their residential properties), that their outstanding balances are significantly below the value of their residential properties),
which are less likely to default.which are less likely to default.55

AboutUs/Reports/ReportDocuments/GFee-Report -2019.pdf.
52 Prior to conservatorship, t he GSEs 51 44 Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78). 45 The Infrastructure Investment and Jobs Act (P.L. 117-58). 46 Section 1601 of HERA requires FHFA to conduct an ongoing study of the guarantee fees charged by the Enterprises. For more information and recent reports, see FHFA, “Fannie Mae and Freddie Mac Guarantee Fees,” https://www.fhfa.gov/policy/guarantee-fees. 47 Prior to conservatorship, the Enterprises had existing programs that transferred the credit risk linked to their multifamily had existing programs that transferred the credit risk linked to their multifamily
programs. For more information, see the section of this report entitledprograms. For more information, see the section of this report entitled “ The GSEs “The Enterprises’ Multifamily Business Business Models.”
53 48 See See FHFA, FHFA, Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions, August, August 2015, 2015,
https://www.fhfa.gov/https://www.fhfa.gov/aboutus/reports/reportdocuments/crt-overviewsites/default/files/2023-03/CRT-Overview-8-21-2015.pdf. -8-21-2015.pdf.
5449 See See FHFA, FHFA, Performance and Accountability Report: FY2018, https://www.fhfa.gov/, https://www.fhfa.gov/AboutUs/Reports/
ReportDocuments/FHFA-2018-PAR.pdf.
55 T he GSEs sites/default/files/documents/FHFA-2018-PAR.pdf. 50 Transferring credit risk via CRT instruments reduces counterparty risk—that is, the risk that the insurer fails to reimburse the Enterprise after a default. 51 The Enterprises may also transfer the credit risk of mortgages retained in their portfolios (typically because they lack may also transfer the credit risk of mortgages retained in their portfolios (typically because they lack the standardized the
standardized features that wouldfeatures that would make them eligiblemake them eligible for placement into an MBS trust for securitization).for placement into an MBS trust for securitization).
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Fannie Mae and Freddie Mac: Recent Administrative Developments CAS and STACR Risk-Tiering Structures The Fannie Mae’s CRT instruments are known as Connecticut Avenue Securities (CAS); Freddie Mac’s CRT instruments are known as Structural Agency Credit Risk (STACR). The CAS and STACR issuances are structured in a tiered system consisting of tranches: a first-loss tranche, two mezzanine tranches, and a senior tranche. • The first-loss tranche is used to transfer expected credit loss risk. FHFA defines expected credit losses as those likely
CAS and STACR Risk-Tiering Structures
The CAS and STACR issuances are structured in a tiered system consisting of tranches: a first-loss tranche, two
mezzanine tranches, and a senior tranche. The first-loss tranche is the first to receive reduced payments in the
event of losses. Once the credit losses exceed those contractual y agreed to by the first-loss tranche investors,
then the two sets of mezzanine tranche investors absorb the losses up to their maximum thresholds, fol owed by
the senior-tranche investors. The GSEs retain 5% of the issuances associated with each tranche (also referred to
as a 5% vertical slice), signaling to investors their wil ingness to hold the same risks that they sel at each tranche,
as they do by holding their own MBSs. The GSEs transfer expected and unexpected credit risks but retain
catastrophic credit risk.

FHFA defines expected credit risk as credit losses likely to occur during periods of stable housing market to occur during periods of stable housing market
conditions when someconditions when some borrowers borrowers fail to repay their mortgages,fail to repay their mortgages, perhaps due to unforeseen life circumstances perhaps due to unforeseen life circumstances
(e.g., job loss,(e.g., job loss, disability, divorce).disability, divorce). The first-loss tranche The first-loss tranche purchases the GSEs’ instruments to assume expected
credit risks. The first-loss tranche assumes the initial 5%, of credit risk losses linked to mortgages held in MBS
trusts. Transferring credit risk via these issuances reduces counterparty risk—that is, the risk that the insurer
fails to reimburse the GSE after a default. The GSEs adjust the coupons on these issuances or retain the
investors’ initial principal.

FHFA defines unexpected credit risk as credit losses that exceed expected credit losses andabsorbs the initial 5% of credit losses linked to mortgages held in MBS trusts. The Enterprises retain 5% of the first-loss tranche and issues the remaining 95% of CRTs to first-loss tranche investors. The Enterprises retain 5% of the issuances associated with the first-loss (and mezzanine tranches), signaling to investors their wil ingness to hold the same risks that they are wil ing to issue (as they do when holding their own MBSs), which is also consistent with risk-retention requirements for securitizations.52 • The mezzanine tranches are used to transfer unexpected credit loss risk. FHFA defines unexpected credit losses as those likely to result from macroeconomic result from
macroeconomic events, such as a recession.events, such as a recession. The mezzanine tranches The mezzanine tranches begin tocol ectively absorb mortgage credit risk absorb mortgage credit risk
after 5% and up to 45% of after 5% and up to 45% of losses. total credit losses linked to mortgages held in MBS trusts. For the mezzanine tranches, the credit riskFor the mezzanine tranches, the credit risk is distributed as fol owsis distributed as fol ows.56 As
mentioned, the GSEs hold 5% of mezzanine risk. :53 The Enterprises retain 5% of all mezzanine tranche risk. The private sector The private sector assumes retains 60% of mezzanine risk60% of mezzanine risk via purchases of the Enterprises’ CRT issuancesvia
purchasing credit-linked instruments issued by the GSEs. For the remaining 35% of mezzanine risk,. For the remaining 35% of mezzanine risk, the GSEs
the Enterprises rely upon another set of CRT risk-sharing programsrely upon another set of CRT risk-sharing programs in which they directly obtain insurance or reinsurance.in which they directly obtain insurance or reinsurance.57
54 Just as the Just as the GSEs Enterprises charge g-feescharge g-fees, to assume credit risk, they pay credit insurance premiumsthey pay credit insurance premiums to insurance and to insurance and
reinsurance firmsreinsurance firms to assume a to assume a predetermined predetermined dol ar amount of the credit risk.dol ar amount of the credit risk.58 55 Fannie Mae’s program is Fannie Mae’s program is
known as Credit Insurance Risk Transfer; Freddieknown as Credit Insurance Risk Transfer; Freddie Mac’s corresponding programMac’s corresponding program is known as Agency Credit is known as Agency Credit
Insurance Structure. Participating institutions, primarilyInsurance Structure. Participating institutions, primarily insurers and reinsurers,insurers and reinsurers, may use proceeds from these may use proceeds from these
programs to diversify their programs to diversify their portfolios portfolios if they have assets that are not highly correlatedif they have assets that are not highly correlated to U.S. residential to U.S. residential
mortgage credit risk. mortgage credit risk.
•
The The GSEsEnterprises retain retain al all of the senior-tranche risk,of the senior-tranche risk, which contains which contains catastrophic risk. credit loss risk. Catastrophic Catastrophic credit losses are those linked to catastrophic events with historically low probabilities of occurrence. The senior credit risk refers
to potential losses (exceeding unexpected losses) that can be highly unlikely to occur. The senior tranche tranche
absorbs credit lossesabsorbs credit losses after the mezzanine and first-lossafter the mezzanine and first-loss tranches have absorbed the initialtranches have absorbed the initial 45% of the 45% of the
mortgage credit risk.59 Because the probability of a catastrophic event is historical y low, the potential costs
borne by U.S. taxpayers are minimized if the GSEs retain catastrophic risk.60 If a catastrophic risk event does
occur, taxpayers ultimately incur large costs.
Sharing risk at both the front end (before the mortgages are purchased) via the mortgage
insurance programs and the back end (after the mortgages are purchased) via the CRT programs
has reduced the federal government’s exposure to mortgage credit risk.61 The CRT programs have
grown rapidly, arguably fil ing the gap left by the private-label MBS market that existed prior to
2008.62 Nevertheless, the Congressional Budget Office reports that the GSEs’ CRT transactions

56 See FHFA, Performance and Accountability Report: FY2018.
57 See David Finkelstein, Andreas Strzodka, and James Vickery, Credit Risk Transfer and De Facto GSE Reform ,
Federal Reserve Bank of New York, February 2018, https://www.newyorkfed.org/medialibrary/media/research/
staff_reports/sr838.pdf; and FHFA, Perform ance and Accountability Report: FY2018.
58 T he term reinsurance may be used because the credit risk is insured twice: once by the GSEs mortgage credit losses linked to mortgages held in MBS trusts.56 For this reason, the catastrophic credit loss risk is more economical for the Enterprises to retain rather than attempt to issue CRTs with sufficiently attractive compensation to encourage retention by private investors.57 Although the CRTs may reduce the Enterprises’ default risk exposure, the Congressional Budget Office reported that these transactions may not necessarily reduce taxpayers’ costs.58 When transferring default risk to the private sector, the Enterprises simultaneously transfer a portion of the g-fee income to the CRT holders. In other words, the trade-off between risk and reward applies in this context such that credit risk reduction for the Enterprises also translates into a portion of g-fee revenue forgone. 52 For more information, see Board of Governors of the Federal Reserve System, “Six Federal Agencies Jointly Approve Final Risk Retention Rule,” press release, October 22, 2014, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20141022a.htm. 53 See FHFA, Performance and Accountability Report: FY2018. 54 See David Finkelstein, Andreas Strzodka, and James Vickery, Credit Risk Transfer and De Facto GSE Reform, Federal Reserve Bank of New York, February 2018, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr838.pdf; and FHFA, Performance and Accountability Report: FY2018. 55 The term reinsurance may be used because the credit risk is insured twice: once by the Enterprises and a second time by and a second time by
another insurance company. another insurance company.
59 56 FHFA acknowledges FHFA acknowledges that a bright line distinction between that a bright line distinction between unexpect edunexpected and catastrophic loss risk has yet to be and catastrophic loss risk has yet to be
defined. defined. T heThe distinction between risk types, however, may not be pertinent distinction between risk types, however, may not be pertinent, because credit risk is measured because credit risk is measured in basis in basis
pointspoints, and the total amounts transferred to the private sector occur after certain basis point and the total amounts transferred to the private sector occur after certain basis point t hresholds.
60 See thresholds. 57 See Joshua D. Coval, JakubJoshua D. Coval, Jakub W. Jurek, and Erik Stafford, “Economic Catastrophic Bonds,” W. Jurek, and Erik Stafford, “Economic Catastrophic Bonds,” American Economic
Review, vol. 99, no. 3 (June 2009), pp. 628, vol. 99, no. 3 (June 2009), pp. 628 -666. -666.
61 See Finkelstein, Strzodka, and Vickery, “Credit Risk T ransfer and De Facto GSE Reform.”
62 See Laurie Goodman, Credit Risk Transfer: A Fork in the Road, Urban Institute, June 2018, https://www.urban.org/
58 See Congressional Budget Office, Transitioning to Alternative Structures for Housing Finance: An Update, August 2018, p. 9, https://www.cbo.gov/system/files/2018-08/54218-GSEupdate.pdf. Congressional Research Service Congressional Research Service

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have not necessarily reduced taxpayers’ costs.63 The GSEs pay more to the private sector to
assume credit risk relative to what they collect in g-fees from borrowers, and the g-fees have not
been raised to cover the additional costs.64
Standardization Initiatives to Foster MBS Liquidity
FHFA FHFA has introduced initiatives to standardize many aspects of the introduced initiatives to standardize many aspects of the GSEsEnterprises’ operations, which ’ operations, which
include their mortgage data collection processes, securitization processes, mortgage servicing include their mortgage data collection processes, securitization processes, mortgage servicing
policiesguidelines (e.g., resolving delinquencies), and MBS issuances. Greater uniformity is expected to (e.g., resolving delinquencies), and MBS issuances. Greater uniformity is expected to
provide greater data integrity for appraisers, servicers, and secondary-market investors. Such provide greater data integrity for appraisers, servicers, and secondary-market investors. Such
standardization standardization arguably increasesmay increase transparency, transparency, reducesreduce the length of the single-family mortgage the length of the single-family mortgage
origination and securitization processes, and ultimately origination and securitization processes, and ultimately increasesincrease the uniform pricing and the uniform pricing and
liquidity of the GSEsliquidity of the Enterprises’ MBS and CRT issuances.’ MBS and CRT issuances.65
Mortgage Data Standardization
FHFA’s mortgage data standardization initiative requires the GSEs to support standardizing the
single-family mortgage 59 These initiatives are discussed in this section. Uniform Mortgage Data Program FHFA’s uniform mortgage data program initiative requires the Enterprises to support standardization of the single-family primary mortgage market data information used by the industry.data information used by the industry.60 Data Data collected on loan on loan
applications, property appraisals, loan closings, and disclosures are the focus of the applications, property appraisals, loan closings, and disclosures are the focus of the
standardization efforts.standardization efforts.
 Mortgage originatorsMortgage originators must prepare more standardized and streamlined prepare more standardized and streamlined mortgage loan packages loan packages
that that can be sent to either GSE to reduce duplication, paperwork, and the length of
time to close loans.66 Standardization can translate into a faster mortgage
origination process for borrowers and better disclosures for MBS investors.
 The GSEs’ automated underwriting processes are enhanced, making it easier to
assess risk and use compensating factors. In addition, standardization reduces
put-back risk, the risk that loan originators must repurchase loans the GSEs
determine are unacceptable.67 Both GSEs use a delegated underwriting process,

sites/default/files/publication/98578/credit_risk_transfer_a_fork_in_the_road_0.pdf. For more information about
private-label MBS markets from 2001 through 2015, see Laurie Goodman, The Rebirth of Securitization: Where Is the
Private-Label Mortgage Market?, Urban Institute, September 2015, https://www.urban.org/sites/default/files/
publication/65901/2000375-The-Rebirth-of-Securitization.pdf.
63 See Congressional Budget Office, Transitioning to Alternative Structures for Housing Finance: An Update, August
2018, p. 9, https://www.cbo.gov/system/files/2018-08/54218-GSEupdate.pdf.
64 T he higher costs to transfer credit risk to the private sector may be another reason that retaining the senior tranche
risk is more economical for the GSEs. See FHFA, Overview of Fannie Mae and Freddie Mac Credit Risk Transfer
Transactions.
65 For more information on the mortgage servicing and loss mitigation initiatives, see FHFA, “ Mortgage Servicing,”
https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Mortgage-Servicing.aspx; and Karan Kaul et al., The
Case for Uniform could be sent and used by either Enterprise. Greater standardizing of mortgage loan packages will expedite the identification of irregularities, which is likely to increase efficiencies in the following areas: • Standardization may enhance the Enterprises’ automated delegated underwriting processes, which rely on the sellers (loan originators) of conventional single-family mortgages to provide information about the mortgage and underwriting standards.61 Standardization may quickly underscore abnormal credit risks and fraudulent information about the borrower, underlying property, or other involved stakeholders (e.g., property seller, title agent, servicer) that could trigger financial losses. Rather than independently verify the information, the Enterprises review samples of their loans to see what percentage meets the contractual standards. Furthermore, because the Enterprises purchase most loans using representations and warranties—that is, contracts that require loan originators to repurchase mortgages that fail to meet contractual standards—standardization may reduce put-back risk, the risk that originators must repurchase unacceptable mortgages.62 59 For more information on the mortgage servicing and loss mitigation initiatives, see FHFA, “Mortgage Servicing,” https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Mortgage-Servicing.aspx; and Karan Kaul et al., The Case for Uniform Mortgage Servicing Data Standards, Urban Institute, November 2018, https://www.urban.org/sites/, Urban Institute, November 2018, https://www.urban.org/sites/
default/files/publication/99317/uniform_mortgage_servicing_data_standards_0.pdf. default/files/publication/99317/uniform_mortgage_servicing_data_standards_0.pdf. T heThe standardization of servicing standardization of servicing
may enhance the attractiveness of CRTmay enhance the attractiveness of CRT investments by clarifying the procedures for handling nonperforming investments by clarifying the procedures for handling nonperforming
mortgages, thus clarifying how losses willmortgages, thus clarifying how losses will be distributedbe distributed among the various tranche classes. For more information, see among the various tranche classes. For more information, see
BaselBasel Committee on Banking Supervision: Committee on Banking Supervision: T heThe Joint Forum, Joint Forum, Report on Asset Securitisation Incentives, July 2011, , July 2011,
https://www.bis.org/publ/joint26.pdf;https://www.bis.org/publ/joint26.pdf; and Patricia A. McCoy, and Patricia A. McCoy, Barriers “Barriers to Federal Hom eHome Mortgage Modification Efforts
During the Financial Crisis, ,” Harvard University Joint Center for Housing Studies,Harvard University Joint Center for Housing Studies, August August 2010, 2010,
https://www.jchs.harvard.edu/sites/default/files/mf10-6.pdf. https://www.jchs.harvard.edu/sites/default/files/mf10-6.pdf.
66 FHFA, “Standardizing Mortgage Data through the Uniform Mortgage Data Program,” press release, October 10,
2017, https://www.fhfa.gov/Media/Blog/Pages/standardizing-mortgage-data-through-the-UMDP.aspx.
67 See FHFA, “FHFA, Fannie Mae and Freddie Mac Launch New Representation and Warranty Framework,” press
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meaning they rely on the sel ers (loan originators) of conventional single-family
mortgages to provide information about the mortgage and underwriting
standards.68 Fraudulent information about the borrower, underlying property, or
loans could be provided by the borrower, property sel er, title agent, or servicer
and result in significant financial losses. Rather than independently verify the
information, the GSEs review samples of their loans to see what percentage
meets the contractual standards. For this reason, the GSEs purchase most loans
using representations and warranties, contracts that require loan originators to
repurchase mortgages that fail to meet contractual standards.
 Standardizing data reporting would enhance FHFA’s ability to standardize and
modify underwriting guidelines, not only for the GSEs but also for any private-
sector guarantors that enter this industry.69
 The broader financial industry, including the mortgage industry, is focusing on
data standardization and further automation.70 Standardizing data increases the
speed with which irregularities can be identified, making it possible to mitigate
credit and operational risks that arise from fraud.71
The Common Securitization Platform
In 2012, FHFA determined that both technology platforms the GSEs used to securitize (the
process of transferring the underlying mortgage payments into MBSs) were “antiquated and
inflexible.”72 Rather than update two separate systems, FHFA required the GSEs to jointly
develop a platform to facilitate various tasks associated with their securitization processes.73 The
GSEs entered into a joint venture, the Common Securitization Solutions (CSS),74 which acts as a

release, September 11, 2012, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Fannie-Mae-and-Freddie-Mac-
Launch-New-Representation-and-Warranty-Framework.aspx; and Laurie Goodman, Ellen Seidman, and Jun Zhu,
Sunset Provisions on Reps and Warrants: Can They Be More Flexible While Still Protecting the GSEs? , Urban
Institute, November 27, 2013, https://www.urban.org/research/publication/sunset-provisions-reps-and-warrants-can-
they-be-more-flexible-while-still-protecting-gses.
68 See Freddie Mac, U.S. Securities and Exchange Commission Form 10-K, December 31, 2018, p. 186,
http://www.freddiemac.com/investors/financials/pdf/10k_021419.pdf; and Fannie Mae, U.S. Securities and Exchange
Com m ission Form 10-K, December 31, 2018, p. 33, http://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-
results/2018/q42018.pdf.
69 See written testimony of Edward J. DeMarco, president, Housing Policy Council, in U.S. Congress, Senate
Committee on Banking, Housing, and Urban Affairs, Chairm an’s Housing Reform Outline, 116th Cong., 1st sess.,
March 26, 2019.
70 See Experian, “Data Standardization,” http://www.experian.com/data-quality/data-standardization.html; and
Electronics Payment Association, “API Standardization Industry Group Release White Paper Outlining Group’s
Approach, Progress and Future Efforts T oward Advancing API Standardization Across the Financial Services
Ecosystem,” https://www.nacha.org/news/api-standardization-industry-group-releases-white-paper-outlining-groups-
approach-progress-and.
71 See J. P. Morgan Chase and Co., Data Standardization: A Call to Action, May 2018,
https://www.jpmorganchase.com/corporate/news/document/call-to-action.pdf; and Basel Committee on Banking
Supervision, Bank for International Settlements, Principles for the Sound Managem ent of Operational Risk, June 2011,
https://www.bis.org/publ/bcbs195.pdf.
72 FHFA, Building a New 60 FHFA, “Uniform Mortgage Data Program,” https://singlefamily.fanniemae.com/delivering/uniform-mortgage-data-program. 61 See Freddie Mac, Form 10-K for the fiscal year ended December 31, 2018, p. 186, https://www.fhfa.gov/sites/default/files/documents/FHFA-2018-PAR.pdf; and Fannie Mae, Form 10-K for the fiscal year ended December 31, 2018, p. 33, https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/quarterly-annual-results/2018/q42018.pdf. 62 See FHFA, “FHFA, Fannie Mae and Freddie Mac Launch New Representation and Warranty Framework,” press release, September 11, 2012, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Fannie-Mae-and-Freddie-Mac-Launch-New-Representation-and-Warranty-Framework.aspx; and Laurie Goodman, Ellen Seidman, and Jun Zhu, (continued...) Congressional Research Service 10 link to page 15 link to page 15 Fannie Mae and Freddie Mac: Recent Administrative Developments • Standardization may facilitate oversight related to fair lending, fair housing, and unfair or deceptive act or practices. For example, on August 10, 2022, FHFA announced that the Enterprises would require mortgage servicers to obtain and maintain fair mortgage data beginning on March 1, 2023.63 The fair lending data would include information such as the accept rate, representing the proportion of applicants approved by the Enterprises’ underwriting systems.64 Although the data alone cannot prove or disprove unlawful discrimination, they can facilitate monitoring trends and irregularities that may be useful in terms of identifying fair lending risk and monitoring compliance. • The Enterprises have adopted standardized credit scores, which may assist with further minimizing price differentials between the Enterprises’ MBS issuances (a topic discussed in the section below entitled “Uniform MBS Single Security Initiative”). Specifically, Section 310 of P.L. 115-174, enacted in 2018, required FHFA to establish standards and criteria for the Enterprises’ credit score model validation and approval processes, which lead to the approval and implementation of newer credit score models.65 The focus on standardization and automation, therefore, can increase various efficiencies not only for the Enterprises but also for any private sector guarantors or other stakeholders entering the mortgage or broader financial industry.66 Common Securitization Platform In 2012, FHFA determined that both technology platforms the Enterprises used to securitize (the process of transferring the underlying mortgage payments into MBSs) were “antiquated and inflexible.”67 Rather than update two separate systems, FHFA required the Enterprises to jointly develop a platform to facilitate various tasks associated with their securitization processes.68 The Enterprises entered into a joint venture, Common Securitization Solutions, which acts as a technology service provider for the Enterprises and provides the following services:69 “Sunset Provisions on Reps and Warrants: Can They Be More Flexible While Still Protecting the GSEs?,” Urban Institute, November 27, 2013, https://www.urban.org/research/publication/sunset-provisions-reps-and-warrants-can-they-be-more-flexible-while-still-protecting-gses. 63 See FHFA, “FHFA Announces Update for Servicers to Maintain Fair Lending Data,” press release, August 10, 2022, https://www.fhfa.gov/news/news-release/fhfa-announces-update-for-servicers-to-maintain-fair-lending-data. 64 For more information, See FHFA, “Fair Lending Data,” https://www.fhfa.gov/data/fair-lending-data. 65 For more information, see FHFA, “FHFA Announces Validation of FICO 10T and VantageScore 4.0 for Use by Fannie Mae and Freddie Mac,” October 24, 2022, https://www.fhfa.gov/news/news-release/fhfa-announces-validation-of-fico-10t-and-vantagescore-4.0-for-use-by-fannie-mae-and-freddie-mac; and CRS In Focus IF12588, Fannie Mae and Freddie Mac Adopt Alternative Credit Scores, by Darryl E. Getter. 66 See written testimony of Edward J. DeMarco, president, Housing Policy Council, in U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Chairman’s Housing Reform Outline, 116th Cong., 1st sess., March 26, 2019. 67 FHFA, “Building a New Infrastructure for the Secondary Mortgage Market,,” October 4, 2012, p. 4, October 4, 2012, p. 4,
https://www.fhfa.gov/https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/Building-a-New-Infrastructure-for-the-Secondary-
Mortgage-Market.aspx.
73 See research/papers/building-new-infrastructure-secondary-mortgage-market. 68 See FHFA, FHFA, 2015 Scorecard Progress Report, March 2016, p. 24, , March 2016, p. 24, httphttps://www.fhfa.gov/://www.fhfa.gov/AboutUs/Reports/
ReportDocuments/Progress-Report-2015-Scorecard.pdf.
74 Both GSEs appointed two of their employees to CSS’s board of managers and jointly announced a CEO. See FHFA
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technology service provider for the GSEs.75 The GSEs continue tosites/default/files/2023-03/progress-report-2015-scorecard.pdf. 69 The CSP arguably reduces the fixed start-up costs for private guarantors (should they be approved) because they will not have to invest in the technology to perform CSP functions. See written testimony of Mark Zandi, chief economist, Moody’s Analytics, U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Chairman’s Housing Reform Outline, 116th Cong., 1st sess., March 26, 2019. Congressional Research Service 11 Fannie Mae and Freddie Mac: Recent Administrative Developments • The Enterprises purchase mortgages from purchase mortgages from
originators, establish separate lossoriginators, establish separate loss- mitigation practices for delinquent and defaulted mortgages mitigation practices for delinquent and defaulted mortgages
for their mortgage servicers to follow, choose the underlying mortgages for placement in each for their mortgage servicers to follow, choose the underlying mortgages for placement in each
MBS trust, and guarantee the credit risk linked to the MBS trusts they MBS trust, and guarantee the credit risk linked to the MBS trusts they individual y create. The
CSS operates the Common Securitization Platform (CSP), which issues and services the MBSs. 76
Common Securitization Platform Services
The CSP provides the fol owing specific services for the GSEs:77

individually create. • The CSP facilitates the initial issuance of MBSs to investors.The CSP facilitates the initial issuance of MBSs to investors. After receiving a After receiving a securitization request from securitization request from a
GSEan Enterprise, the CSP validates the details related to the MBS trust and linked MBSs that , the CSP validates the details related to the MBS trust and linked MBSs that wil will be issued to investors be issued to investors
(e.g., confirming(e.g., confirming the mortgagesthe mortgages held in held in aan MBS trust, confirming the average principal and interest payment MBS trust, confirming the average principal and interest payment
amounts as amounts as wel well as the maturity on the linkedas the maturity on the linked MBSs, and confirming the identification code on the security MBSs, and confirming the identification code on the security
used to facilitate clearing and settlementused to facilitate clearing and settlement of trades). of trades). The CSSCommon Securitization Solutions notifies the notifies the GSEsEnterprises of any data inconsistencies. of any data inconsistencies.78

• The CSP releasesThe CSP releases required disclosuresrequired disclosures for MBS investors.for MBS investors.79 Data about MBSs is Data about MBSs is sent to the Federalsent to the Federal Reserve Reserve
Bank of New York or the DepositoryBank of New York or the Depository Trust and Clearing Corporation—Trust and Clearing Corporation—typical ytypically two days before issuance, two days before issuance,
al owingallowing information about MBSs to be disclosed information about MBSs to be disclosed to marketto market participants—which facilitate the transfer of MBSs participants—which facilitate the transfer of MBSs
to investorsto investors in exchange for cash. The CSP confirmsin exchange for cash. The CSP confirms issuance and payment informationissuance and payment information back to the issuing back to the issuing
GSE.

Enterprise. • The CSP provides ongoing administration of MBSs for investors.The CSP provides ongoing administration of MBSs for investors. For example, For example, the CSP calculates repayments the CSP calculates repayments
of principal and interest to MBS holders for tax reporting purposes. The CSP provides monthly updates of principal and interest to MBS holders for tax reporting purposes. The CSP provides monthly updates
about the prepayment status of the underlying about the prepayment status of the underlying col ateral to ensure investors have current disclosures collateral to ensure that investors have current disclosures about about
information relevant to the linked MBS’s performance.

and HUD, Office of Federal Housing Enterprise Oversight, “Enterprise Capital Requirements,” 83 Federal Register
33312-33430, July 17, 2018.
75 In a similar manner, banks and credit unions rely upon third-party service providers to develop the software and
customer interfaces for customer account and payment services as well as to maintain the digital technology. For more
information, see CRS In Focus IF10935, Technology Service Providers for Banks, by Darryl E. Getter. T he CSP would
arguably reduce the fixed start -up costs for private guarantors (should they be approved) because they will not have to
invest in the technology to perform CSP functions. See written testimony of Mark Zandi, chief economist, Moody’s
Analytics, U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Chairm an’s Housing Reform
Outline, 116th Cong., 1st sess., March 26, 2019.
76 Fannie Mae, “CEO, Board Members Named at Common Securitization Solutions, LLC,” press release, November 3,
2014, http://www.fanniemae.com/portal/about-us/media/corporate-news/2014/6187.html. T he GSE employees who
initially began working at CSS to develop the CSP were converted to permanent CSS employees, and CSS is its own
corporate entity. See Common Securitization Solutions at http://www.commonsecuritization.com/.
77 See FHFA, Building a New Infrastructure for the Secondary Mortgage Market, p. 5; and FHFA, An Update on the
Com m on Securitization Platform , September 15, 2015, pp. 10-12, http://www.fhfa.gov/AboutUs/Reports/
ReportDocuments/CSP-Update-Final-9-15-2015.pdf.
78 T he Mortgage Electronic Registration Systems is the electronic system that tracks the ownership of mortgages in the
United States and the servicing rights. It uses the mortgage identification number as the unique loan identifier for the
CSP. See Bill Beckman, president and CEO of MERSCORP Holdings, letter to FHFA, Office of Strategic Initiatives,
June 28, 2013, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Documents/Securitization-Infrastructure/
6.28.2013.MERS_Response_to_FHFA_re_CSI.pdf ; Fannie Mae, Selling Guide, July 3, 2019,
https://www.fanniemae.com/content/guide/selling/b8/7/
01.html#Naming.20MERS.20as.20the.20Nominee.20for.20the.20Beneficiary.20in.20the.20Security.20Instrument ; and
Fannie Mae, U.S. Securities Form 10-K, December 31, 2015, https://www.sec.gov/Archives/edgar/data/310522/
000031052216000453/fanniemae201510k.htm.
79 T he GSEs are exempt from required SEC disclosures.
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The information relevant to the linked MBS’s performance. Uniform MBS Single Security Initiative
In the TBA market, a loan originator In the TBA market, a loan originator sel ing selling mortgages to the mortgages to the GSEsEnterprises contracts to deliver contracts to deliver
mortgages in exchange for an MBS at a specified future date. mortgages in exchange for an MBS at a specified future date. Specifical ySpecifically, the MBS buyer (loan , the MBS buyer (loan
originator) and MBS originator) and MBS sel erseller (one of the (one of the GSEsEnterprises) negotiates in advance for future delivery and ) negotiates in advance for future delivery and
settlement date for the trade. The buyer and settlement date for the trade. The buyer and sel erseller agree on six general agree on six general features that the MBS that the MBS
should have: the issuer, maturity, coupon rate, sale price, approximate face value, and settlement should have: the issuer, maturity, coupon rate, sale price, approximate face value, and settlement
date.date.8070 The exact features of the securities to be delivered are disclosed to the participants two The exact features of the securities to be delivered are disclosed to the participants two
days prior to delivery and settlement. days prior to delivery and settlement.
MBSs that meet the required criteria can be delivered so long as the underlying MBS pools are MBSs that meet the required criteria can be delivered so long as the underlying MBS pools are
fungible—that is, sufficiently interchangeable with other MBSs. Because the MBS issuer is one —that is, sufficiently interchangeable with other MBSs. Because the MBS issuer is one
of the trading features, MBSs have of the trading features, MBSs have general ygenerally been fungible only with other MBSs issued by the been fungible only with other MBSs issued by the
same same GSEEnterprise. Fannie Mae–issued MBSs and Freddie Mac–issued MBSs have not previously been . Fannie Mae–issued MBSs and Freddie Mac–issued MBSs have not previously been
interchangeable, and their MBSs do not trade at identical prices despite the fact that the interchangeable, and their MBSs do not trade at identical prices despite the fact that the GSEs
have essential yEnterprises have essentially the same federal charters and business (securitization) models. the same federal charters and business (securitization) models.81
71 Prior to the single security initiative, Freddie Mac’s MBSs frequently traded at lower prices Prior to the single security initiative, Freddie Mac’s MBSs frequently traded at lower prices than
Fannie Mae’s.82 Following declines in mortgage rates that prompt compared to those issued by Fannie Mae.72 Following declines in mortgage rates that prompt 70 See Vickery and Wright, TBA Trading and Liquidity in the Agency MBS Market. 71 An economic theory known as the law of one price states that identical securities should sell for identical prices. See Owen A. Lamont and Richard H. Thaler, “The Law of One Price in Financial Markets,” Journal of Economic Perspectives, vol. 17, no. 4 (Fall 2003), pp. 191-202. 72 Laurie Goodman, “The $400 Million Case for a Single GSE Security,” Urban Institute, September 5, 2014, http://www.urban.org/urban-wire/400-million-case-single-gse-security. Congressional Research Service 12 Fannie Mae and Freddie Mac: Recent Administrative Developments borrowers to refinance, the borrowers to refinance, the
mortgage pools underlying Freddie Mac’s MBSs mortgage pools underlying Freddie Mac’s MBSs historical yhistorically had faster prepayment rates (relative had faster prepayment rates (relative
to Fannie Mae’s MBSs). Faster prepayment translates into higher prepayment risk for Freddie to Fannie Mae’s MBSs). Faster prepayment translates into higher prepayment risk for Freddie
Mac MBS investors, which would explain trading at lower prices. Furthermore, a large mortgage Mac MBS investors, which would explain trading at lower prices. Furthermore, a large mortgage
originator could subsequently enter into a swap agreement with Fannie Mae to acquire a higher-originator could subsequently enter into a swap agreement with Fannie Mae to acquire a higher-
priced MBS (compared to Freddie Mac) and immediately priced MBS (compared to Freddie Mac) and immediately resel resell it in the OTC market. Freddie it in the OTC market. Freddie
Mac could respond by lowering its g-fees, thereby slightly increasing its MBS coupons relative to Mac could respond by lowering its g-fees, thereby slightly increasing its MBS coupons relative to
Fannie Mae’s MBS coupons to remain somewhat competitive. Nevertheless, Freddie Mac’s MBS Fannie Mae’s MBS coupons to remain somewhat competitive. Nevertheless, Freddie Mac’s MBS
issuances were approximately 70% of Fannie Mae’s MBS issuances, and Freddie Mac’s MBSs issuances were approximately 70% of Fannie Mae’s MBS issuances, and Freddie Mac’s MBSs
accounted for 9% of total trading activity in 2014.accounted for 9% of total trading activity in 2014.8373 Hence, the pricing differential between the Hence, the pricing differential between the
GSEsEnterprises’ MBSs provided Fannie Mae a competitive advantage in the secondary market over Freddie ’ MBSs provided Fannie Mae a competitive advantage in the secondary market over Freddie
Mac as Mac as wel well as other prospective privateas other prospective private- sector securitizers.sector securitizers.84
74 Under the single security initiative, FHFA has directed the Under the single security initiative, FHFA has directed the GSEsEnterprises to align their key contractual and to align their key contractual and
business practices by acquiring mortgages with similar prepayment speeds along with other business practices by acquiring mortgages with similar prepayment speeds along with other
features.features.8575 The The GSEsEnterprises may continue to separately purchase conforming mortgages and guarantee may continue to separately purchase conforming mortgages and guarantee
the credit risks linked to the MBS trusts they create. Nevertheless, harmonizing the financial the credit risks linked to the MBS trusts they create. Nevertheless, harmonizing the financial
characteristics of their mortgage purchases would characteristics of their mortgage purchases would al ow the GSEsallow the Enterprises’ MBS trusts to generate similar ’ MBS trusts to generate similar
cash-cash flow predictability and prepayment speeds, thus facilitating the creation of uniform and flow predictability and prepayment speeds, thus facilitating the creation of uniform and
fungible securities when issued through the CSP. The fungible securities when issued through the CSP. The GSEsEnterprises would be required would be required to align their to align their

80 See Vickery and Wright, TBA Trading and Liquidity in the Agency MBS Market.
81 An economic theory known as “the law of one price” states that identical securities should sell for identical prices.
See Owen A. Lamont and Richard H. T haler, “The Law of One Price in Financial Markets,” Journal of Economic
Perspectives, vol. 17, no. 4 (Fall 2003), pp. 191-202.
82 Laurie Goodman, The $400 Million Case for a Single GSE Security, Urban Institute, September 5, 2014,
http://www.urban.org/urban-wire/400-million-case-single-gse-security.
83 Goodman, The $400 Million Case for a Single GSE Security.
84 Laurie Goodman and Jim Parrott, A Progress Report on Fannie Mae and Freddie Mac’s Move to a Single Security,
Urban Institute, August 2018, https://www.urban.org/sites/default/files/publication/98872/single_security_0.pdf.
85 See FHFA, “Uniform Mortgage-Backed Security,” 84 Federal Register 7793-7801, March 5, 2019.
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prepayment speeds such that they do not constitute a material misalignment or a divergence by prepayment speeds such that they do not constitute a material misalignment or a divergence by
more than 2% over a three-month interval.more than 2% over a three-month interval.8676
Rather than separate MBS issuances (i.e., Fannie Mae’s Rather than separate MBS issuances (i.e., Fannie Mae’s mortgage-backed securityMBS and Freddie and Freddie
Mac’s participation certificates), FHFA has directed the Mac’s participation certificates), FHFA has directed the GSEsEnterprises (via the CSP) to issue one common (via the CSP) to issue one common
security, the uniform mortgage-backed security (UMBSs). (Privatesecurity, the uniform mortgage-backed security (UMBSs). (Private- sector guarantors would also sector guarantors would also
be able to use the CSP to issue fungible UMBSs.) FHFA argues that a combined market for the be able to use the CSP to issue fungible UMBSs.) FHFA argues that a combined market for the
GSEs’ Enterprises’ UMBSs would enhance market liquidity and mitigate the rise of market liquidity UMBSs would enhance market liquidity and mitigate the rise of market liquidity
premiums. The pricing differential would also be eliminated.premiums. The pricing differential would also be eliminated.87 FHFA is to monitor both GSEs to
77 FHFA monitors both Enterprises to avoid material misalignment that compromises UMBS fungibility.avoid material misalignment that compromises UMBS fungibility.8878 UMBS issuances began on UMBS issuances began on
June 3, 2019.June 3, 2019.89
Potential Post-Conservatorship Issues for the GSEs
After exiting conservatorship, providing support for broader access to mortgage credit may be
chal enging. Although the GSEs are likely to have the caps on their lending portfolios removed
(assuming termination of the PSPAs with Treasury), they wil have capital requirements and
additional restrictions that might potential y limit their activities. Furthermore, the GSEs must
stil achieve their statutory single- and multifamily goals among other requirements to promote
affordable housing. Specifical y, the requirements can be summarized in the following categories:
 The GSEs must satisfy affordable housing goals that require them to purchase
certain percentages of mortgages for families with very low incomes (at or below
50% of area median family income) and extremely low incomes (at or below
30% of area median family income).90
 HERA created a duty to serve for three underserved markets—manufactured
housing, rural housing, and affordable housing preservation. FHFA requires the
GSEs to develop their own duty-to-serve plans to encourage lenders to increase
their lending in these areas.
 HERA requires the GSEs to make cash contributions to the Housing Trust Fund
(HTF) and the Capital Magnet Fund (CMF). The HTF funds states and state-

86 See FHFA, “Uniform Mortgage-Backed Security,” 84 Federal Register 7793-7801, March 5, 2019.
8779 73 Goodman, “The $400 Million Case.” 74 Laurie Goodman and Jim Parrott, “A Progress Report on Fannie Mae and Freddie Mac’s Move to a Single Security,” Urban Institute, August 2018, https://www.urban.org/sites/default/files/publication/98872/single_security_0.pdf. 75 See FHFA, “Uniform Mortgage-Backed Security,” 84 Federal Register 7793-7801, March 5, 2019. 76 See FHFA, “Uniform Mortgage-Backed Security.” 77 FHFA, FHFA, An Update on the Structure of the Single Security, May 15, 2015, p. 4, https://www.fhfa.gov/AboutUs/, May 15, 2015, p. 4, https://www.fhfa.gov/AboutUs/
Reports/ReportDocuments/Single%20Security%20Update%20final.pdf. For a discussionReports/ReportDocuments/Single%20Security%20Update%20final.pdf. For a discussion on the effects of on the effects of
standardization in the mortgage and MBSstandardization in the mortgage and MBS markets, see Adam J. Levitin and Susanmarkets, see Adam J. Levitin and Susan M. Wachter, “Explaining the M. Wachter, “Explaining the
HousingHousing Bubble,”Bubble,” Georgetown Law Journal, vol. 100, no. 4 (April 12, 2012), pp. 1177-1258. , vol. 100, no. 4 (April 12, 2012), pp. 1177-1258.
88 T he78 The Securities Industry and Financial Markets Association (SIFMA)—a Securities Industry and Financial Markets Association (SIFMA)—a trade association for broker-dealers, trade association for broker-dealers,
investment banks, and asset managers operating in investment banks, and asset managers operating in t hethe United States and global United States and global capital markets—advocates for capital markets—advocates for
legislative, regulatory, and businesslegislative, regulatory, and business policies on behalf of their members. SIFMApolicies on behalf of their members. SIFMA sets the sets the T BATBA trading conventions, trading conventions,
which includeswhich includes the the T BATBA settlement guidelines known as the Uniform Practices for the settlement guidelines known as the Uniform Practices for the Clearance and Settlement of Clearance and Settlement of
Mortgage-Backed SecuritiesMortgage-Backed Securities and Other Related Securities.and Other Related Securities. SIFMA SIFMA recommends that FHFA, whilerecommends that FHFA, while regulating regulating the the
mortgage purchasing andmortgage purchasing and trust structuring activities, ensure thattrust structuring activities, ensure that the GSEs the Enterprises do not deviate from the do not deviate from the requirement srequirements to to
securitize mortgage originations with standardized borrower characteristics. securitize mortgage originations with standardized borrower characteristics.
89 79 See See FHFA, “Statement of FHFA Deputy Director Robert Fishman on the Launch of the NewFHFA, “Statement of FHFA Deputy Director Robert Fishman on the Launch of the New Uniform MortgageUniform Mortgage --
BackedBacked Security (UMBS),”Security (UMBS),” press release, June 3, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-press release, June 3, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-
FHFA-Deputy-Director-RobertFHFA-Deputy-Director-Robert -Fishman-on-the-launch-of-the-new-Uniform-Mortgage-Backed-Security.aspx. -Fishman-on-the-launch-of-the-new-Uniform-Mortgage-Backed-Security.aspx.
90 Given the uncertainty associated with the COVID-19 pandemic, FHFA set the GSEs’ purchase goals only for 2021
and left them unchanged from 2020. See FHFA, “FHFA Announces 2021 Affordable Housing Goals for Fannie Mae
and Freddie Mac,” press release, December 16, 2020, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-
Announces-2021-Affordable-Housing-Goals-for-Fannie-Mae-and-Freddie-Mac.aspx.
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designated entities for eligible Congressional Research Service 13 Fannie Mae and Freddie Mac: Recent Administrative Developments Post-Conservatorship Operations FHFA has implemented policies relevant for the operation of the Enterprises that will remain effective post-conservatorship. For example, rather than limiting risk exposure with lending portfolio caps, which are likely to be removed upon termination of the PSPAs with Treasury, the Enterprises will have higher capital requirements. In addition, FHFA has made modifications to the framework and other requirements for the Enterprises’ multifamily lending activities. The Enterprises must also demonstrate progress with respect to serving various underserved markets. This section discusses these post-conservatorship policies. Restoration of Housing Trust Fund and Capital Magnet Fund Cash Contributions HERA requires the Enterprises to make cash contributions to the Housing Trust Fund (HTF) and the Capital Magnet Fund (CMF). The HTF funds states and state-designated entities for eligible activities that primarily support affordable rental activities that primarily support affordable rental
housing for low-income families, including homeless families.housing for low-income families, including homeless families.9180 The CMF The CMF
awards competitive grants to financial institutions designated as Community awards competitive grants to financial institutions designated as Community
Development Financial Institutions and qualified nonprofit housing organizations Development Financial Institutions and qualified nonprofit housing organizations
for which the development or management of affordable housing is one of their for which the development or management of affordable housing is one of their
principal purposes.principal purposes.9281 The The GSEsEnterprises must set aside 4.2 basis points (0.042%) of the must set aside 4.2 basis points (0.042%) of the
unpaid principal balance of mortgages purchased in a year for these funds.unpaid principal balance of mortgages purchased in a year for these funds.93
This section discusses some regulatory requirements likely to affect the GSEs’ operations after
they exit conservatorship.
FHFA suspended the requirement that the Enterprises make contributions to the HTF and the CMF between 2008 and 2014 when they first entered into conservatorship. These requirements were reinstated in 2015. Heightened Capital Buffer Requirements: The 2020 Capital Rule
Although the precise definitions of Although the precise definitions of capital for financial firms is for financial firms is typical ytypically determined by laws and determined by laws and
regulations, it regulations, it general ygenerally refers to common or preferred equity shareholders (as a percentage of refers to common or preferred equity shareholders (as a percentage of
assets) and retained earnings, which can absorb financial losses. For the assets) and retained earnings, which can absorb financial losses. For the GSEsEnterprises, the statutory , the statutory
minimum leverage (unweighted) capital requirement, specified in the Federal Housing minimum leverage (unweighted) capital requirement, specified in the Federal Housing
Enterprises Safety and Soundness Act of 1992 (P.L. 102-550), is equal to 2.5% of on-balanceEnterprises Safety and Soundness Act of 1992 (P.L. 102-550), is equal to 2.5% of on-balance
-sheet (portfolio) assets and 0.45% of off-balancesheet (portfolio) assets and 0.45% of off-balance -sheet (MBS trust) obligations.sheet (MBS trust) obligations.94 HERA gave HERA gave
FHFA the authority to increase capital standards above the statutory minimum as necessary. FHFA the authority to increase capital standards above the statutory minimum as necessary.
FHFA FHFA suspended the suspended the GSEsEnterprises’ capital requirements during conservatorship, as ’ capital requirements during conservatorship, as initial y initially required by required by
the PSPAs with Treasury. the PSPAs with Treasury. On September 30, 2019, Treasury announced modifications toThe initial PSPAs required the Enterprises to pay Treasury a 10% cash dividend on the amount of the outstanding preferred shares, and dividend payments were suspended for all private Enterprise stockholders. The Enterprises did not have the option to issue additional stock shares or obtain funds elsewhere if they lacked the cash to make full dividend payments to Treasury.82 On August 17, 2012, therefore, the 10% dividend was replaced with a profit sweep dividend requirement, such that all net worth proceeds (that exceeded an initial $3 billion cash buffer that would be reduced annually by $600 million until reaching zero) 80 the
PSPAs to al ow the GSEs to retain their earnings and accumulate capital reserves.95 Fannie Mae
and Freddie Mac were al owed to accumulate $25 bil ion and $20 bil ion, respectively. On
October, 28, 2019, FHFA announced a strategic plan to prepare Fannie Mae and Freddie Mac for
their eventual exit from conservatorship.96 In December 2020, FHFA finalized a rule establishing
risk-based and leverage capital requirements for Fannie Mae and Freddie Mac effective on
February 16, 2021.97 The capitalization requirements, which would be in place following the
GSEs’ exits from conservatorship, are designed to increase their resiliency to a severe financial
downturn.98

91 After estimating the median family income for designated counties and metropolitan areas, HUD provides annual After estimating the median family income for designated counties and metropolitan areas, HUD provides annual
definitions for definitions for extrem ely low-incom e fam ilyextremely low-income family and and very low-incom e fam ilyincome family, which are used, which are used to determine eligibility for to determine eligibility for
various programs. various programs. For more information on the HT F, seeSee HUD, “Housing HUD, “Housing T rustTrust Fund,” Fund,” https://www.hudexchange.info/https://www.hudexchange.info/
programs/htf/. programs/htf/.
9281 See See U.S.U.S. Department of Department of T reasurythe Treasury, Community Development Financial Institutions Fund, “Capital Magnet Fund,” , Community Development Financial Institutions Fund, “Capital Magnet Fund,”
https://www.cdfifund.gov/programs-training/Programs/cmf/Pages/default.aspx; and Department of the https://www.cdfifund.gov/programs-training/Programs/cmf/Pages/default.aspx; and Department of the T reasuryTreasury,
Community Development Financial Institutions Fund, “Funding Opportunities: Capital Magnet Fund;Community Development Financial Institutions Fund, “Funding Opportunities: Capital Magnet Fund; 2018 Funding 2018 Funding
Round,”Round,” 8383 Federal Register, 34685-34698, July 20, 2018.
93 FHFA suspended the requirement that the GSEs make contributions to the HT F and the CMF between 2008 and
2014 when they first entered into conservatorship . T hese requirement s were reinstated in 2015.
94 P.L. 102-550 created OFHEO and set the current 34685-34698, July 20, 2018. 82 See Don Layton, “Temporarily Ending the GSEs Net Worth Sweep: A Limited but Important Step Towards GSE Reform,” Harvard University Joint Center for Housing Studies, October 2, 2019, https://www.jchs.harvard.edu/blog/temporarily-ending-the-gse-net-worth-sweep-a-limited-but-important-step-towards-gse-reform. Congressional Research Service 14 link to page 17 Fannie Mae and Freddie Mac: Recent Administrative Developments would be paid to Treasury.83 The August 2012 PSPAs also required the Enterprises to reduce the size of their lending (retained) portfolios to $250 billion. In 2017, Treasury and FHFA reinstated the capital reserves to $3 billion each to avoid further draws from Treasury by the Enterprises.84 On September 30, 2019, Treasury further modified the PSPAs to allow Fannie Mae and Freddie Mac to retain earnings and accumulate capital reserves of $25 billion and $20 billion, respectively. On October 28, 2019, FHFA announced a strategic plan to prepare the Enterprises for their eventual exit from conservatorship. In December 2020, FHFA finalized a rule establishing risk-based and leverage capital leverage capital requirements for Fannie Mae and Freddie Mac effective on February 16, 2021.85 The capitalization requirements, which would be in place following the Enterprises’ exits from conservatorship, are designed to increase their resiliency to a severe financial downturn.86 For this reason, the PSPAs were again modified on January 14, 2021, to allow the Enterprises to accumulate the necessary amount of reserves to satisfy the prudential requirements of the 2020 capital rule.87 In February 2022, FHFA announced amendments to the December 2020 rule specifically to revise the Enterprises’ leverage buffer requirements and the risk-based treatment of the CRT exposures, discussed in the textbox below.88 Compliance with the heightened capital buffer requirements avoids limits on capital distributions and discretionary bonus payments. 83 For all the PSPA agreements, see FHFA, “Senior Preferred Stock Purchase Agreements,” https://www.fhfa.gov/conservatorship/senior-preferred-stock-purchase-agreements. 84 A tax revision (P.L. 115-97) would have resulted in anticipated reductions in the Enterprises’ deferred tax asset values, discussed in their 2013 Form 10-K reports. See Fannie Mae, Form 10-K for the fiscal year ended December 31, 2013, pp. 3, 80, 143, https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/quarterly-annual-results/2013/10k_2013.pdf; and Freddie Mac, Form 10-K for the fiscal year ended December 31, 2013, pp. 135, 138, 231, 10-K for the fiscal year ended December 31, 2013, https://www.freddiemac.com/investors/financials/pdf/10k_022714.pdf. 85 See requirements in statute.
95 See U.S. Department of T reasury, “ Treasury Department and FHFA Modify T erms of Preferred Stock Purchase
Agreements for Fannie Mae and Freddie Mac,” press release, September 30, 2019, https://home.treasury.gov/news/
press-releases/sm786.
96 See FHFA, “FHFA Releases New Strategic Plan and Scorecard for Fannie Mae and Freddie Mac.”
97 See FHFA, “Enterprise Regulatory Capital Framework,” 85 FHFA, “Enterprise Regulatory Capital Framework,” 85 Federal Register, 243, December 17, 2020. 243, December 17, 2020.
9886 If, for example, a sudden If, for example, a sudden and significantly sharp declineand significantly sharp decline in house prices generated widespreadin house prices generated widespread underwater mortgages mortgages
(held in MBS(held in MBS trusts and in their portfolios), the trusts and in their portfolios), the GSEsEnterprises’ capital buffers’ capital buffers could becould be insufficient to allow them to continue insufficient to allow them to continue
safe and soundsafe and sound operations. A mortgage is underwater when the home value declinesoperations. A mortgage is underwater when the home value declines far belowfar below the amount of the outstanding loan balance, providing the borrower with the financial incentive to default. See Neil Bhutta, Jane Dokko, and Hui Shan, The Depth of Negative Equity and Mortgage Default Decisions, Board of Governors of the Federal Reserve System, May 2010, http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdf. 87 See FHFA, “FHFA and Treasury Allow Fannie Mae and Freddie Mac to Continue to Retain Earnings,” press release, January 14, 2021, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-and-Treasury-Allow-Fannie-Mae-and-Freddie-Mac-to-Continue-to-Retain-Earnings.aspx. The 2020 capital rule will be discussed in the section of this report titled “Heightened Capital Buffer Requirements.” 88 See FHFA, “FHFA Announces Final Rule Amending the Enterprise Regulatory Capital Framework,” press release, February 25, 2022, https://www.fhfa.gov/news/news-release/fhfa-announces-final-rule-amending-the-enterprise-regulatory-capital-framework; and FHFA, “Enterprise Regulatory Capital Framework—Prescribed Leverage Buffer Amount and Credit Risk Transfer,” 87 Federal Register 14764-14772, March 16, 2022. Congressional Research Service 15 Fannie Mae and Freddie Mac: Recent Administrative Developments Highlights of the Enterprise Regulatory Capital Framework The supplemental capital requirements pertain to both an increase the amount of the
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Highlights of the Regulatory Capital Ratio Requirements
The final capital regulatory rule adopts terminology and definitions used in the banking capital regulatory
framework to prescribe the supplemental capital requirements. The use of consistent terminology and definitions
that are general y understood by many financial stakeholders facilitates not only greater transparency but also the
ability to compare the prudential capital buffers maintained across other classes of financial institutions.99 The
supplemental capital requirements pertain to both an increase in the quantity of capital (from the statutory P.L. in the quantity of capital (from the statutory P.L.
102-550 requirements) and the composition of the capital.102-550 requirements) and the composition of the capital.89 The statutory and supplemental capital definitions The statutory and supplemental capital definitions
constitute the capital regulatory frameworkconstitute the capital regulatory framework with the fol owing broad requirementswith the fol owing broad requirements.
: •
An unweighted total leverage An unweighted total leverage requirement requirement (UNWLR) of 4% can be computed as the sum of a 2.5% of 4% can be computed as the sum of a 2.5% statutory leverage ratio
requirement and a 1.5% and a 1.5% prescribed leverage buffer amount.

A risk-weighted adjusted total capital ratio of not less than 8% can be computed in what can be described as a
three-step process. First, the asset (the loan) is multiplied by a risk amount (PLBA) under the initial 2020 final rule. Fol owing the 2022 amendment, the PLBA was revised and is currently set to 50% of the stability capital buffer, which is one of the components of the prescribed capital conservation buffer amount (PCCBA) discussed in the next bul et. • A risk-weighted adjusted total capital ratio (RWCR) of not less than 8% can be computed in what can be described as a three-step process. First, the asset (the loan) is multiplied by a risk weight that is designed to capture the weight that is designed to capture the
riskiness riskiness of the borrower.of the borrower. FHFA FHFA provides the riskprovides the risk weights for the single-familyweights for the single-family and multifamilyand multifamily mortgage mortgage
exposures depending upon various financial factors (e.g.,exposures depending upon various financial factors (e.g., current LTV, loan purpose, property type, fixed or current LTV, loan purpose, property type, fixed or
floating interest rate).floating interest rate).10090 Second, the risk-weighted Second, the risk-weighted asset (i.e.,asset (i.e., the product of the originalthe product of the original asset multiplied by
the risk asset multiplied by the risk weight) is multipliedweight) is multiplied by 8%. by 8%. Typical yTypically, the entire asset side of the balance sheet is risk, the entire asset side of the balance sheet is risk weighted, and weighted, and
then the risk-weightedthen the risk-weighted assets are summed priorassets are summed prior to applying the 8% capital charge. Third, the to applying the 8% capital charge. Third, the prescribed capital
conservation buffer amount (PCCBA) requirements are applied to the total capital ratio and, instead of adding
more layers of capital, modify PCCBA requirements, which adds modifications to the total capital ratio’s composition the total capital ratio’s composition to , are applied to achieve the adjusted total capital ratio.achieve the adjusted total capital ratio.
The GSEs must comply with these broadly defined and further (more detailed) capital ratio requirements to avoid
limits on capital distributions and discretionary bonus payments.
General y speaking, the GSEs As previously stated, the stability capital buffer is one of the adjustments included in the overall PCCBA adjustment. Thus, the Enterprises now have both unweighted and weighted capital requirements have both unweighted and weighted capital requirements. The
unweighted (risk-insensitive) adjusted total leverage requirement (UNWLR) is based upon the
size of a financial firm’s balance sheet, which has similarities to the capital framework applied to banks. The UNWLR is based upon the balance sheet size and represents the maximum loss that can be absorbed by and represents the maximum loss that can be absorbed by
its equity.101 By contrast, the risk-weighted adjusted total capital ratio (RWCR)its equity.91 The RWCR is designed to is designed to
align proportionately with align proportionately with a financial firm’s the gradations of credit risk exposure, presuming gradations of credit risk exposure, presuming
accuracy of the risk-weighting system.accuracy of the risk-weighting system.10292 The RWCR incorporates a minimum common equity The RWCR incorporates a minimum common equity
ratio requirement to ensure that it consists predominantly of common equity and retained earningsratio requirement to ensure that it consists predominantly of common equity and retained earnings
that, which have greater loss-absorbing capacity. have greater loss-absorbing capacity.
The size of the UNWLR relative to the RWCR has implications for a financial firm’s risk-taking The size of the UNWLR relative to the RWCR has implications for a financial firm’s risk-taking
behavior. behavior. WhenFor example, when the UNWLR is the UNWLR is lower relative to the RWCR, a financial firm has a greater relative to the RWCR, a financial firm has a greater
incentive to vary the incentive to vary the level (rather than the compositionlevel (i.e., scales of operation) of its risk exposure in proportion to its ) of its risk exposure in proportion to its
available available capital.capital.10393 In other words, the Enterprises could choose to increase or decrease their mortgage purchases under changing macroeconomic circumstances to the extent their RWCRs fluctuate with In other words, the GSEs are more likely to react to risk exposure by raising

outstanding loan balance, providing the borrower with the financial incentive to default. See Neil Bhutta, Jane Dokko,
and Hui Shan, The Depth of Negative Equity and Mortgage Default Decisions, Board of Governors of the Federal
Reserve System, May 2010, http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdf.
99 See Financial Stability Oversight Council, 2018 Annual Report, June 20, 2019, https://home.treasury.gov/system/
files/261/FSOC2018AnnualReport.pdf.
100 T he risk weights will be determined using two approaches—a standardized approach and an advanced approach.
T he standardized approach utilizes FHFA-prescribed lookup grids and risk multipliers. T he advanced approach will
rely upon each of the GSEs’ internal models. T he approach generating the higher risk -weighting will be used when
determining risk-based capital requirements.
101 Leverage ratios are designed to become more binding when the economy is growing and less binding when the
economy contracts. See Michael Brei and Leonardo Gambacorta, The Leverage Ratio Over the Cycle, Bank for
International Settlements, November 2014, http://www.bis.org/publ/work471.pdf.
102 T he reliability of risk-weighted capital ratios depends upon the accuracy of the risk-weighting system, which
typically assigns lower weights to assets (e.g., cash, U.S. T reasury securities) deemed to have little or no credit risk and
higher weights to assets (e.g., mortgages) and financial exposures (e.g., credit risk linked to underlying mortgage
assets) deemed to have greater amounts of credit risk.
103 T he lower UNWLR would function more as a backstop should the assigned risk-weights used to calculate the
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or lowering their scales of operation without significantly altering business strategies. However,
such mortgage purchase variations are likely to occur under changing macroeconomic
circumstances, because the final rule links the GSEs’ capital requirements to house prices and house prices and
business business cycle fluctuations. If, for example, a recession promptscycles. Furthermore, if recession fears prompt some common equity holders to some common equity holders to
liquidate liquidate their shares (in anticipation of greater mortgage delinquencies and defaults), the their shares (in anticipation of greater mortgage delinquencies and defaults), the GSEs
Enterprises may react in accord by reducing loan purchases. Hence, the may react in accord by reducing loan purchases. Hence, the GSEsEnterprises’ ability to function as a ’ ability to function as a
countercyclical macroeconomic buffer would be compromised if they were to provide less countercyclical macroeconomic buffer would be compromised if they were to provide less
liquidity liquidity to the mortgage market during recessionary periods.to the mortgage market during recessionary periods.104
94 Alternatively,Alternatively, when the UNWLR equals or exceeds the RWCR, a financial firm has an incentive when the UNWLR equals or exceeds the RWCR, a financial firm has an incentive
to alter the to alter the compositioncomposition of its risk exposure (via changing business strategies) particularly when of its risk exposure (via changing business strategies) particularly when
its capital is comprisedits capital is comprised primarily of shareholders of shareholders monitoring itsprimarily focusing on return on equity (ROE). The return on equity (ROE). The
ROE measures the financial return for shareholders, computed with net income as its numerator ROE measures the financial return for shareholders, computed with net income as its numerator
and the total amount of common shareholder equity as its denominator. If a firm’s net income and the total amount of common shareholder equity as its denominator. If a firm’s net income
fails to keep pace with common equity requirements, the ROE may decrease and become less fails to keep pace with common equity requirements, the ROE may decrease and become less
financial yfinancially attractive for shareholders. A financial firm is likely attractive for shareholders. A financial firm is likely to respond by increasing its risk to respond by increasing its risk
exposure, customer fees, or both to boost the numerator and ultimately sustain more attractive exposure, customer fees, or both to boost the numerator and ultimately sustain more attractive
ROE ROE levels. In other words, the Enterprises could choose to retainlevels. Hence, if UNWLR exceeds RWCR, the GSEs could respond by retaining more credit more credit
risk (e.g., reducing junior and mezzanine CRT issuances), increasing g-fees on mortgage risk (e.g., reducing junior and mezzanine CRT issuances), increasing g-fees on mortgage
borrowers, or bothborrowers, or both when UNWLR exceeds RWCR. . The ability to simultaneously The ability to simultaneously compensate the private sector to assume credit
transfer some g-fee income to the private sector as compensation for assuming credit risks (via CRT) and maintain acceptable ROEs for shareholders may prove risks (via CRT) and maintain acceptable ROEs for shareholders may prove chal engingchallenging without without
raising g-fees, which are typical y paid by borrowers.105
In the proposed and final rules, FHFA il ustrates the combined calculations of UNWLR and
RWCR for Fannie Mae and Freddie Mac. The proposed rule provides an example in which the
combined UNWLR would exceed the combined RWCR.106 The final rule provides an example in
which the combined UNWLR would exceed the combined RWCR. Hence, predicting the GSEs’
responses under the heightened capital regulatory framework upon their exits from
conservatorship is chal enging, especial yraising g-fees, resulting in higher mortgage rates for borrowers. The 2022 amendments to the initial 2020 capital framework addressed the above-mentioned incentive concerns.95 The initially risk-insensitive PLBA, for example, is now more dynamic and can grow and shrink with an Enterprise’s balance sheet, thus lessening the need for an Enterprise to alter its scale of operations when macroeconomic conditions change. Reducing the size of the risk weight initially assigned to CRT exposures from 10% to 5% may be less likely to deter an Enterprise to transfer risk. Nevertheless, predicting the Enterprises’ responses fol owing conservatorship under the new capital framework without prior observations of UNWLR and RWCR without prior observations of UNWLR and RWCR
movements under different interest rate, housing market, and business cycle environmentsmovements under different interest rate, housing market, and business cycle environments.
The GSEs’ Multifamily Business Models
Multifamily mortgages are loans secured by a residential dwel ing is challenging. 89 The final capital regulatory rule adopts terminology and definitions used in the banking capital regulatory framework (continued...) Congressional Research Service 16 Fannie Mae and Freddie Mac: Recent Administrative Developments The Enterprises’ Multifamily Business Models A multifamily mortgage is a loan secured by a residential dwelling, such as an apartment building, , such as an apartment building,
with at least five or more separate units. Multifamily real estate frequently refers to properties with at least five or more separate units. Multifamily real estate frequently refers to properties
used as residential used as residential dwel ingsdwellings, including traditional apartment buildings, including traditional apartment buildings,; subsidized subsidized housing,
housing; housing for seniors (age-restricted, independent, and assisted living)housing for seniors (age-restricted, independent, and assisted living),; and housing for students and housing for students
(dormitories).(dormitories).107 In the multifamily mortgage market, Fannie Mae and Freddie Mac In the multifamily mortgage market, Fannie Mae and Freddie Mac purchase mortgages and transfer a portion (or share) of the default risks to the private sector.96 FHFA has issued various directives for the Enterprises’ multifamily programs. In 2013, FHFA reduced the Enterprises’ new multifamily purchase volumes by 10% from the 2012 caps to shrink their multifamily operations and risks to taxpayers.97 FHFA subsequently directed the Enterprises to limit their 2014 multifamily purchase volumes at or below the 2013 caps.98 In 2014, FHFA excluded several business activities from counting toward the cap, which might make it possible for the Enterprises to provide greater support in the affordable housing and underserved market segments before reaching the cap. In 2016, FHFA also excluded loans that would finance certain energy and water efficiency (i.e., green loans) from the multifamily purchase caps. From 2016 to 2018, the Enterprises’ share of multifamily lending activities that grew were related to green loans that were excluded from the cap, while those included in the capped declined.99 that many financial stakeholders generally understand to facilitate greater transparency as well as the ability to compare the prudential capital buffers maintained across other classes of financial institutions. 90 The risk weights are determined using two approaches—a standardized approach and an advanced approach. The standardized approach uses FHFA-prescribed lookup grids and risk multipliers. The advanced approach relies on each of the Enterprises’ internal models. The approach generating the higher risk-weighting is used when determining risk-based capital requirements. 91 Leverage ratios are designed to become more binding when the economy is growing and less binding when the economy contracts. See Michael Brei and Leonardo Gambacorta, The Leverage Ratio Over the Cycle, Bank for International Settlements, November 2014, http://www.bis.org/publ/work471.pdf. 92 The reliability of risk-weighted capital ratios depends upon the accuracy of the risk-weighting system, which typically assigns lower weights to assets (e.g., cash, U.S. Treasury securities) deemed to have little or no credit risk and higher weights to assets (e.g., mortgages) and financial exposures (e.g., credit risk linked to underlying mortgage assets) deemed to have greater amounts of credit risk. 93 The lower UNWLR functions as a backstop if the assigned risk weights used to calculate the RWCR underestimate the credit risk exposure. See Paul Glasserman and Wanmo Kang, Design of Risk Weights, Office of Financial Research, August 19, 2014, https://www.financialresearch.gov/working-papers/2014/08/19/design-of-risk-weights/. 94 See Edward Golding, Laurie Goodman, and Jun Zhu, “Analysis of the Proposed 2020 FHFA Rule on Enterprise Capital,” Urban Institute, August 2020, https://www.urban.org/sites/default/files/publication/102779/analysis-of-the-proposed-2020-rule-on-enterprise-capital_2.pdf. 95 See FHFA, “Fact Sheet: Final Rule to Amend the Enterprise Regulatory Capital Framework,” https://www.fhfa.gov/sites/default/files/2024-05/Fact-Sheet-Final-Rule-CRT_2252022.pdf. 96 For more information on multifamily mortgage finance as well as the Enterprises’ underwriting and risk-sharing models, see CRS Report R46480, Multifamily Housing Finance and Selected Policy Issues, by Darryl E. Getter. 97 See FHFA, “FHFA Seeks Public Input on Reducing Fannie Mae and Freddie Mac Multifamily Businesses,” press release, August 9, 2013, https://www.fhfa.gov/news/news-release/fhfa-seeks-public-input-on-reducing-fannie-mae-and-freddie-mac-multifamily-businesses. 98 The 2013 volume that became the 2014 cap for Fannie Mae was $30 billion. The 2013 volume that became the 2014 cap for Freddie Mac was $26 billion. See Karan Kaul, “The GSEs’ Shrinking Role in the Multifamily Market,” Urban Institute, April 2015, https://www.urban.org/sites/default/files/publication/48986/2000174-The-GSEs-Shrinking-Role-in-the-Multifamily-Market.pdf. 99 See FHFA, “Fact Sheet: New Multifamily Caps for Fannie Mae and Freddie Mac,” https://www.mortgagetranslations.gov/sites/default/files/2023-03/newmultifamilycaps-9132019.pdf. Congressional Research Service 17 Fannie Mae and Freddie Mac: Recent Administrative Developments On September 13, 2019, FHFA revised its directive regarding the multifamily purchase caps, increasing them from the 2018 caps of $35 billion each to $100 billion each for Fannie Mae and Freddie Mac.100 Moreover, 37.5% of the Enterprises’ loan purchases must be mission driven. By purchasing mission-driven multifamily mortgages that support affordable rental housing, the Enterprises are less likely to crowd out (impede) private purchase

RWCR underestimate the firm’s credit risk exposure. See Paul Glasserman and Wanmo Kang, Design of Risk Weights,
Office of Financial Research, August 19, 2014, https://www.financialresearch.gov/working-papers/2014/08/19/design-
of-risk-weights/.
104 See Edward Golding, Laurie Goodman, and Jun Zhu, Analysis of the Proposed 2020 FHFA Rule on Enterprise
Capital, Urban Institute, August 2020, https://www.urban.org/sites/default/files/publication/102779/analysis-of-the-
proposed-2020-rule-on-enterprise-capital_2.pdf.
105 See FHFA, Freddie Mac: Comments on Proposed Enterprise Regulatory Capital Framework, August 28, 2020,
https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment -Detail.aspx?CommentId=15606.
106 See FHFA, “ Enterprise Regulatory Capital Framework,” 85 Federal Register 39274-39406, June 30, 2020.
107 For more information on multifamily mortgage finance, see CRS Report R46480, Multifamily Housing Finance and
Selected Policy Issues, by Darryl E. Getter.
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mortgages and transfer a portion (or share) of the default risks to the private sector, although they
have different underwriting and risk-sharing business models.
Summary of Fannie Mae and Freddie Mac Multifamily Business Models
The multifamily programs adopted by Fannie Mae and Freddie Mac share or redistribute the credit risk linked to
multifamily mortgages.

Fannie Mae primarily relies on its Delegated Underwriting and Servicing (DUS) business model when
purchasing multifamily mortgages.108 Under the DUS process, Fannie delegates to its pre-approved group of
lenders (that sel multifamily mortgages to Fannie Mae) the responsibility of assessing borrowers’
creditworthiness (i.e., the likelihood of loan delinquency or default). The lenders, fol owing Fannie Mae’s
standardized underwriting and servicing guidelines, close and service the approved loans on Fannie Mae’s
behalf. The lenders are also required to enter into mortgage default loss sharing agreements with Fannie Mae,
which fosters alignment of their incentives to perform prudential underwriting. Fannie Mae offers two types
of loss sharing agreements. A pro rata loss sharing agreement requires the lender to assume one-third of the
losses and Fannie Mae assumes the remaining two-thirds.109 A tiered-basis loss sharing agreement requires
lenders to bear the initial 5% of the unpaid principal balance and then share any remaining losses up to a
prescribed limit.110 On October 24, 2019, Fannie Mae introduced Multifamily Connecticut Avenue Securities, a
multifamily credit risk transfer program with similarities to Freddie Mac’s multifamily risk-sharing approach.111

Freddie Mac relies on its pre-approval business model that consists of its own team of in-house
underwriters.112 Freddie Mac internal y re-underwrites and approves multifamily mortgages prior to
purchasing them from lenders. Freddie Mac subsequently issues and sel s certificates referred to as K-
Certificates (or K-Deals), thus offloading various amounts of default loss risk to private-sector investors (e.g.,
real estate investment trusts, pension funds, hedge funds).113 Freddie Mac’s K-Deals have similarities to Fannie
Mae’s Multifamily Connecticut Avenue Securities.
FHFA has issued various directives for the GSEs’ multifamily programs. In 2013, FHFA reduced
the GSEs’ new multifamily purchase volumes by 10% from the 2012 caps to shrink their
multifamily operations and risks to taxpayers.114 FHFA subsequently directed the GSEs to limit

108 See Fannie Mae, Delegated Underwriting and Servicing (DUS), Fourth Quarter 2011,
https://multifamily.fanniemae.com/sites/g/files/koqyhd161/files/migrated-files/content/fact_sheet/wprskret.pdf.
109 In some isolated cases, Fannie Mae has purchased non-DUS mortgages (e.g., small balance loans or pools of
seasoned loans) from lenders without a loss sharing agreement to meet various objectives and in situations where it
may not have a long-term relationship with the lender.
110 See Fannie Mae, Form 10-K, For the Fiscal Year Ended December 31, 2018, December 31, 2018, p. 100,
https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/quarterly-annual-results/
2018/q42018.pdf.
111 See Fannie Mae, “Fannie Mae Price Inaugural Multifamily Connecticut Avenue Securities Deal: Landmark $472.7
Million T ransaction Complements Fannie Mae’s Multifamily Credit Insurance Risk T ransfer and Delegated
Underwriting and Servicing Loss-Sharing Programs,” October 24, 2019, https://www.fanniemae.com/portal/media/
financial-news/2019/multifamily-connecticut -avenue-securities-6947.html.
112 See Freddie Mac, Multifamily Securitization Overview, June 30, 2019, https://mf.freddiemac.com/docs/
mf_securitization_investor-presentation.pdf.
113 See Freddie Mac, Multifamily Securities, https://mf.freddiemac.com/investors/securities.html. In addition to K-
Deals, Freddie Mac offers a variety of certificates that back the performance of specific types of multifamily structures
to appeal to investors with varying appetites for risk. Freddie Mac may retain in its portfolio some of the multifamily
default risk, such as any losses resulting from extremely unfavorable macroeconomic conditions, which is referred to as
catastrophic risk. See CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked
Questions, by Darryl E. Getter.
114 See FHFA, “FHFA Seeks Public Input on Reducing Fannie Mae and Freddie Mac Multifamily Businesses,” press
release, August 9, 2013, https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/
MultifamilyInput080913Final.pdf; and FHFA, Conservatorship Strategic Plan: Perform ance Goals for 2013 ,
https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2013EnterpriseScorecard_508.pdf.
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their 2014 multifamily purchase volumes at or below the 2013 caps.115 In 2014, FHFA excluded
several business activities from counting toward the cap, which might make it possible for the
GSEs to provide greater support in the affordable housing and underserved market segments
before reaching the cap.116 In 2016, FHFA also excluded loans that would finance certain energy
and water efficiency (i.e., green loans) from the multifamily purchase caps.
On September 13, 2019, FHFA revised its directive regarding the multifamily purchase caps,
increasing them from the 2018 caps of $35 bil ion each to $100 bil ion each for Fannie Mae and
Freddie Mac.117 Moreover, 37.5% of the GSEs’ loan purchases must be mission driven. By
purchasing mission-driven multifamily mortgages that support affordable rental housing, the
GSEs are less likely to crowd out (impede) private-sector lender participation by offering cheaper sector lender participation by offering cheaper
borrowing rates for multifamily loans.borrowing rates for multifamily loans.118 Al 101 All multifamily mortgage purchases multifamily mortgage purchases wil count toward count toward
the cap—no exemptions or exclusions.the cap—no exemptions or exclusions.119102 In short, FHFA’s revised policy is designed to prevent In short, FHFA’s revised policy is designed to prevent
the the GSEsEnterprises’ multifamily programs from growing without a more explicit link to affordable rental ’ multifamily programs from growing without a more explicit link to affordable rental
units for low- and moderate-income and other units for low- and moderate-income and other historical yhistorically underserved renters—while making a underserved renters—while making a
reasonable economic return—rather than crowd out private economic return—rather than crowd out private- sector lending activities in market sector lending activities in market
segments with less apparent credit gaps.segments with less apparent credit gaps.120 FHFA also provided an updated comprehensive
definition of mission-driven multifamily purchases.121
The GSEs must stil satisfy their annual mission-driven goals.122 FHFA established three
multifamily housing mission-driven goals for the GSEs for 2021 purchases:123

115 T he 2013 volume that became the 2014 cap for Fannie Mae was $30 billion. T he 2013 volume that became the 2014
cap for Freddie Mac was $26 billion. See Karan Kaul, The GSEs’ Shrinking Role in the Multifam ily Market, Urban
Institute, April 2015, https://www.urban.org/sites/default/files/publication/48986/2000174-The-GSEs-Shrinking-Role-
in-the-Multifamily-Market.pdf.
116 See FHFA, “Fact Sheet: New Multifamily Caps for Fannie Mae and Freddie Mac,” press release,
https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/newmultifamilycaps-9132019.pdf.
117 See FHFA, “FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae and Freddie 103 On December 14, 2022, FHFA finalized a rule to establish the benchmark levels for multifamily housing goals using a new percentage-based methodology.104 The three subgoals are each established as a percentage of the total number of affordable multifamily properties financed by the GSEs each year. Because new developments may occur over the period that can increase the infeasibility to meet a housing goal defined in terms of units, the percentage-based methodology lessens the need to amend the benchmarks after publication of the final rule. The FHFA also provided an updated comprehensive definition of mission-driven multifamily purchases.105 Examples of additional eligible mission-driven mortgage purchases for the GSEs include properties subsidized by the Low-Income Housing Credit program; loans on properties covered by Section 8 Housing Assistance Payment contracts, which limit tenant incomes to 80% or below of the Area Median Income; and loans of properties in which a Public Housing Authority or nonprofit affiliate is the developer (borrower) that reserves units for occupancy by tenants with limited income or the rents that may be charged for those units.106 100 See FHFA, “FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac,” press release, Mac,” press release,
September 13, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Revises-Multifamily-Loan-Purchase-September 13, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Revises-Multifamily-Loan-Purchase-
Caps-for-Fannie-Mae-and-Freddie-Mac.aspx. Caps-for-Fannie-Mae-and-Freddie-Mac.aspx.
118 See 101 See FHFA, “Fannie Mae andFHFA, “Fannie Mae and Freddie Freddie Mac Multifamily Businesses,”Mac Multifamily Businesses,” https://www.fhfa.gov/https://www.fhfa.gov/
PolicyProgramsResearch/Policy/Pages/Reducing-Fannie-Mae—Freddie-Mac-Multifamily-Businesses.aspx. PolicyProgramsResearch/Policy/Pages/Reducing-Fannie-Mae—Freddie-Mac-Multifamily-Businesses.aspx.
119102 For example, exemptions for multifamily loans used For example, exemptions for multifamily loans used to finance energy and water improvements to finance energy and water improvements would still count still count
toward the cap. Seetoward the cap. See Kathleen Howley, “FHFA Moves to Curb Fannie Mae, FreddieKathleen Howley, “FHFA Moves to Curb Fannie Mae, Freddie Mac GreenMac Green Loans for Multifamily: Loans for Multifamily:
Regulator RaisesRegulator Raises Lending Lending Caps for GSEsCaps for GSEs but but Ends the EnergyEnds the Energy -Efficiency Carve-Out,” -Efficiency Carve-Out,” Housingwire, September 13, , September 13,
2019, https://www.housingwire.com/articles/50147-fhfa-moves-to-curb-fannie-mae-freddie-mac-green-loans-for-2019, https://www.housingwire.com/articles/50147-fhfa-moves-to-curb-fannie-mae-freddie-mac-green-loans-for-
multifamily/. multifamily/.
120 T he GSEs’ 103 The Enterprises’ statutory public purpose includesstatutory public purpose includes an “affirmative obligation to facilitate the financing of affordable an “affirmative obligation to facilitate the financing of affordable
housing for low-housing for low- and moderate-income families in a manner consistent with their overall public purposes, while and moderate-income families in a manner consistent with their overall public purposes, while
maintaining a strong financial condition and a reasonable economic return.maintaining a strong financial condition and a reasonable economic return. ” See 12 U.S.C.” See 12 U.S.C. §4501(7). Both §4501(7). Both GSEEnterprise
charters authorize them to perform “charters authorize them to perform “ activities relating to mortgages on housing for low-activities relating to mortgages on housing for low- and moderate-income families and moderate-income families
involving a reasonable economic return that may be less than the return earned on other activities.” See 12 U.S.C. involving a reasonable economic return that may be less than the return earned on other activities.” See 12 U.S.C.
§§1451, 1716 note. §§1451, 1716 note.
121 FHFA, “FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac—Appendix A:
Multifamily Definitions,” press release, September 9, 2019, https://www.fhfa.gov/Conservatorship/Documents/
AppendixA-Revisions-to-2019-FHFA-Conservatorship-Scorecard.pdf.
122 T he GSEs’ primary regulator is required by the Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (P.L. 102-550, T itle XIII, §1302, 106 Stat. 3941) to establish annual housing goals for mortgages purchased by
the GSEs. See FHFA, “ Federal Housing Finance Agency Charter: Federal Housing Enterprises Financial Safety and
Soundness Act of 1992,” https://www.fhfa.gov/Government/Documents/Federal-Housing-Enterprises-Financial-
Safety-and-Soundness-Act.pdf.
123 See FHFA, “2021 Enterprise Housing Goals,” 85 Federal Register 82881-82896, December 21, 2020.
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1. The annual benchmark level for the low -income multifamily housing goal was
set at 315,000 units for Fannie Mae and for Freddie Mac. A low-income family is
defined as having an income of less than or equal to 80% of area median income
(AMI).124
2. The annual benchmark level for the very low -income multifamily housing goal
was set at 60,000 units for Fannie Mae and for Freddie Mac. A very low-income
family is defined as having an income of no greater than 50% of AMI.
3. The annual benchmark level for the smal multifamily property goal was set at
10,000 units for Fannie Mae and for Freddie Mac. A small multifamily property is
defined as a property with five units to 50 units.
Prior to conservatorship, the GSEs104 FHFA, “FHFA Finalizes 2023-2024 Multifamily Housing Goals for Fannie Mae and Freddie Mac,” press release, December 14, 2022, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Finalizes-2023-2024-Multifamily-Housing-Goals-for-Fannie-Mae-and-Freddie-Mac.aspx; and CRS Report R46480, Multifamily Housing Finance and Selected Policy Issues, by Darryl E. Getter. 105 FHFA, “FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac—Appendix A: Multifamily Definitions,” press release, September 9, 2019, https://www.fhfa.gov/Conservatorship/Documents/AppendixA-Revisions-to-2019-FHFA-Conservatorship-Scorecard.pdf. 106 See CRS Report RS22389, An Introduction to the Low-Income Housing Tax Credit, by Mark P. Keightley; and CRS Report RL34591, Overview of Federal Housing Assistance Programs and Policy, by Maggie McCarty, Libby Perl, and Katie Jones. Congressional Research Service 18 Fannie Mae and Freddie Mac: Recent Administrative Developments Prior to conservatorship, the Enterprises’ multifamily business activities were arguably diversified such ’ multifamily business activities were arguably diversified such
that cash flows from some lending activities could offset cashthat cash flows from some lending activities could offset cash -flow disruptions stemming from flow disruptions stemming from
other lending activities. Because low- and moderate-income tenants have greater difficulty paying other lending activities. Because low- and moderate-income tenants have greater difficulty paying
market-level rents, mortgages used to finance these multifamily structures may experience greater market-level rents, mortgages used to finance these multifamily structures may experience greater
cash flow disruptions. If FHFA’s requirements pertaining to multifamily caps were to remain cash flow disruptions. If FHFA’s requirements pertaining to multifamily caps were to remain
intact upon exit from conservatorship, the intact upon exit from conservatorship, the GSEsEnterprises’ multifamily portfolios may exhibit greater cash ’ multifamily portfolios may exhibit greater cash
flow volatilityflow volatility if a larger share of their multifamilyif a larger share of their multifamily lending activities are heavily concentrated in lending activities are heavily concentrated in
certain mission-related activities.certain mission-related activities.125107 In other words, In other words, reducing the GSEs’ limiting the Enterprises’ involvement in certain activities may present a challengeinvolvement in activities
that would crowd out private-sector lenders may present a chal enge for them to make an
for them to make an economic return that shareholders would also find reasonable. economic return that shareholders would also find reasonable.
Duty to Serve: Manufactured Housing Chattel Loans
As mentioned, GSEs have a HERA created a duty to serve for the Enterprises with respect toduty to serve three underserved markets three underserved markets—: manufactured housing, manufactured housing,
rural housing, and affordable housing preservation.rural housing, and affordable housing preservation.
The GSEs face several chal enges to provide support for manufactured housing, which involves
chattel lending versus Supporting manufactured housing—particularly in underserved communities—is considered to be an affordable option. This option, however, poses several challenges for the Enterprises. Manufactured housing involves chattel lending, which differs from real property lending. A manufactured home is a factory-built home that is real property lending. A manufactured home is a factory-built home that is
transportable in one or more sections; has been constructed after June 15, 1976; and is built on a transportable in one or more sections; has been constructed after June 15, 1976; and is built on a
permanent metal chassis and must meet the safety standards set by the U.S. Department of permanent metal chassis and must meet the safety standards set by the U.S. Department of
Housing and Urban Development.Housing and Urban Development.126108 Mortgage loans can be used to finance homes that are Mortgage loans can be used to finance homes that are
permanently attached to real property.permanently attached to real property.127109 By contrast, By contrast, manufactured home chattel loans are used to finance personal property (chattel) that is not permanently attached to land. Because the cost to purchase a manufactured home is typically far below the cost to purchase a site-built home, a manufactured home may be a viable affordable housing option for low-income borrowers.110 By facilitating liquidity to the chattel market, the Enterprises can make progress toward achieving all three duty-to-serve goals, because manufactured homes are disproportionately located in nonmetropolitan areas occupied by residents with lower incomes or net worth.111 The Enterprises have noted, however, that pursuit of 107 Multifamily mortgages are underwritten based manufactured home chattel loans are used

124 FHFA uses HUD-published AMIs to determine affordability for the GSEs’ single-family and multifamily mortgage
acquisitions. AMI is a measure of median family income derived from the Census Bureau’s American Community
Survey.
125 Multifamily mortgages are underwritten based on the current and anticipated cash flows—predominantly in the on the current and anticipated cash flows—predominantly in the
form of rental income—generated by the properties. If the tenants in multifamily properties are form of rental income—generated by the properties. If the tenants in multifamily properties are co stcost-burdened, meaning -burdened, meaning
that their monthly housing (rent) costs that their monthly housing (rent) costs exceedsexceed 30% of their income, then the 30% of their income, then the rental income streams necessary to repay rental income streams necessary to repay
loans may exhibit greater volatility, thus increasing the loans may exhibit greater volatility, thus increasing the GSEs’ cash flow Enterprises’ cash-flow volatilities and loss risks. For more volatilities and loss risks. For more
information, see CRSinformation, see CRS Report R46480, Report R46480, Multifam ilyMultifamily Housing Finance and Selected Policy Issues, by Darryl E. Getter. , by Darryl E. Getter.
126 108 By contrast, a manufactured home built before June By contrast, a manufactured home built before June 15, 1976, that does not meet HUD standards is referred to as a 15, 1976, that does not meet HUD standards is referred to as a
mobile home. Fewmobile home. Few lenders are willinglenders are willing to provide loans to finance mobile homes. In contrast to mobile and to provide loans to finance mobile homes. In contrast to mobile and
manufactured homes, a modularmanufactured homes, a modular home is constructed to the same state, local, or regional buildinghome is constructed to the same state, local, or regional building codes codes as siteas site -built -built
homes. Seehomes. See HUD, “HUD, “ Frequently Asked Questions for On-Site Completion of Construction of Manufactured Homes,” Frequently Asked Questions for On-Site Completion of Construction of Manufactured Homes,”
https://www.hud.gov/program_offices/housing/rmra/mhs/faqs.https://www.hud.gov/program_offices/housing/rmra/mhs/faqs. Moving a manufactured home from a permanent site to Moving a manufactured home from a permanent site to
another one may interfere with its loan financing. another one may interfere with its loan financing. T husThus, modular homes may be considered, modular homes may be considered better investments. See better investments. See
American Financing, “What Is a Chattel MortgageAmerican Financing, “What Is a Chattel Mortgage?,” https://www.americanfinancing.net/mortgage-basics/chattel-,” https://www.americanfinancing.net/mortgage-basics/chattel-
mortgage. mortgage.
127109 See See Fannie Mae, “Fannie Mae, “ Key Legal Distinctions Between Manufactured Home Chattel Lending and RealKey Legal Distinctions Between Manufactured Home Chattel Lending and Real Property Property
Lending,” JuneLending,” June 29, 2018, https://www.fanniemae.com/media/28481/display. 110 See FHFA, “Fannie Mae and Freddie Mac Support for Chattel Financing of Manufactured Homes Request for Input,” January 2017, https://www.fanniemae.com/media/28481/display. 111 See Consumer Financial Protection Bureau (CFPB), “Manufactured-Housing Consumer Finance in the United States,” September 2014, https://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf. Congressional Research Service 19 Fannie Mae and Freddie Mac: Recent Administrative Developments 29, 2018, https://www.fanniemae.com/media/28481/display.
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to finance personal property (chattel) that is not permanently attached to land. Because the cost to
purchase a manufactured home is typical y far below the cost to purchase a site-built home, a
manufactured home may be a viable affordable housing option for low-income borrowers.128 By
facilitating liquidity to the chattel market, the GSEs can make progress toward achieving al three
duty-to-serve goals, because manufactured homes are disproportionately located in non-
metropolitan areas occupied by residents with lower incomes or net worth.129 The GSEs have
noted, however, that pursuit of their duty-to-serve obligations contains substantial risks that may their duty-to-serve obligations contains substantial risks that may
adversely affect their financial results and conditions.adversely affect their financial results and conditions.130112 Providing support for chattel loans Providing support for chattel loans
includes the following includes the following chal enges:
challenges: • Lenders Lenders general ygenerally show more show more wil ingnesswillingness to provide loans for manufactured to provide loans for manufactured
homes titled as real property. For one reason, recovering losses if a borrower homes titled as real property. For one reason, recovering losses if a borrower
defaults on a chattel loan is more difficult. Suppose, for example, a borrower defaults on a chattel loan is more difficult. Suppose, for example, a borrower
leases rather than purchases the land beneath the manufactured home titled as leases rather than purchases the land beneath the manufactured home titled as
personal property, which may be an affordable option for a low- or extremely personal property, which may be an affordable option for a low- or extremely
low-income household. If a borrower defaults on a chattel loan, then the lender low-income household. If a borrower defaults on a chattel loan, then the lender
can repossess the property peaceably as a repossession or through a replevin can repossess the property peaceably as a repossession or through a replevin
lawsuit.lawsuit.131113 If, however, the borrower is also delinquent on the land lease, then re- If, however, the borrower is also delinquent on the land lease, then re-
marketing a repossessed manufactured home—either on its current site or if it marketing a repossessed manufactured home—either on its current site or if it
must be moved to another site—adds more legal complications and expenses must be moved to another site—adds more legal complications and expenses
likelylikely to further reduce the amount of losses that may be recovered.to further reduce the amount of losses that may be recovered.132
114 • Manufactured Manufactured home owners typical yhomeowners typically pay higher annual percentage rates pay higher annual percentage rates—the
(APRs)—the total cost of a loan (both the interest rates and transaction fees)—for total cost of a loan (both the interest rates and transaction fees)—for
their loans in comparison to site builders.their loans in comparison to site builders.133115 The The GSEs have adopted policies
prohibitingEnterprises have prohibited purchases of high-cost loans that are consistent with their missions to purchases of high-cost loans that are consistent with their missions to
facilitate affordable housing. Certain consumer protections that exist when facilitate affordable housing. Certain consumer protections that exist when
dwel ingsdwellings are attached to land, however, do not apply to chattel loans. For are attached to land, however, do not apply to chattel loans. For
example, the integrated disclosures requiring lenders, mortgage brokers, or example, the integrated disclosures requiring lenders, mortgage brokers, or
servicers of home loans to disclose loan pricing information to borrowers do not servicers of home loans to disclose loan pricing information to borrowers do not
apply when the apply when the dwel ingdwelling is not attached to land. is not attached to land.134116 Fewer disclosures may lead to Fewer disclosures may lead to
greater uncertainty about the extent that borrowers could have received cheaper greater uncertainty about the extent that borrowers could have received cheaper
financing or were aware of less costly financing or were aware of less costly financing alternatives. • Securitizing chattel loans is challenging. Chattel loans cannot be placed in the same pools with other mortgages linked to UMBS issuances, which have strict prepayment speed requirements and homogenous credit risks. Secondary market security issuances linked to chattel loans must be structured from pools consisting only of chattel loans—more likely to have homogeneous financial risks—to enhance investors’ understanding of the likely performance of their investments, which may not be economically feasible.117 Thus, the collection of performance data to better understand the prepayment and default risks pertaining to chattel loans may help determine how to create secondary market securities that investors may find attractive. 112 See financing alternatives.

128 See FHFA, “Fannie Mae and Freddie Mac Support for Chattel Financing of Manufactured Homes Request for
Input,” January 2017, https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Chattel-Pilot-RFI.pdf.
129 See Consumer Financial Protection Bureau (CFPB), “Manufactured-Housing Consumer Finance in the United
States,” September 2014, https://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
130 See Fannie Mae, Fannie Mae, Form 10-K, For the Fiscal Year Ended December 31, 2019,Form 10-K for the fiscal year ended December 31, 2019, p. 31, December 31, 2019, p. 31,
https://www.fanniemae.com/https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/quarterly-annual-results/2019/q42019.pdf; and Freddie Macresources/file/ir/pdf/quarterly-annual-results/2019/q42019.pdf; and Freddie Mac, Form
10-K, For the Fiscal Year Ended Decem ber 31, 2019 , 10-K for the fiscal year ended December 31, 2019, p. 152, December 31, 2019, p. 152, httphttps://www.freddiemac.com/://www.freddiemac.com/
investors/financials/pdf/10k_021320.pdf. investors/financials/pdf/10k_021320.pdf.
131113 See See Justia, “Foreclosures of Manufactured Homes,” https://www.justia.com/foreclosure/foreclosures-of-Justia, “Foreclosures of Manufactured Homes,” https://www.justia.com/foreclosure/foreclosures-of-
manufactured-homes/. manufactured-homes/.
132 See 114 See Fannie Mae, “Key Legal DistinctionsFannie Mae, “Key Legal Distinctions between Manufactured Home Chattel Lending and Real Property
Lending.”
133.” 115 According to the CFPB, According to the CFPB, a chattel chattel loansloan may be priced between may be priced between 50 and 500 basis50 and 500 basis points higher than a mortgage loan points higher than a mortgage loan
for a manufactured home securedfor a manufactured home secured by real property. See CFPB, “by real property. See CFPB, “ Manufactured-Housing Consumer FinanceManufactured-Housing Consumer Finance in the
United States.”
134 See .” 116 See CFPB, “CFPB Consumer LawsCFPB, “CFPB Consumer Laws and Regulations: Regulation X Realand Regulations: Regulation X Real Estate Settlement Procedures Act,” Estate Settlement Procedures Act,”
https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf. https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf.
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 Securitizing chattel loans is chal enging. Chattel loans cannot be placed in the
same pools with other mortgages linked to UMBS issuances, which have strict
prepayment speed requirements and homogenous credit risks. Secondary market
security issuances linked to chattel loans must be structured from pools
consisting only of chattel loans—more likely to have homogeneous financial
risks—to enhance investors’ understanding of the likely performance of their
investments. Because chattel securities have not been introduced to the capital
market since the mid-2000s, Fannie Mae reports “a lack of chattel performance
data for investors to understand the prepayment and default risk in chattel loans;
therefore, the investor appetite for a chattel security is unknown.”135
Fannie Mae and Freddie Mac are developing plans to provide liquidity for manufactured housing
titled as chattel through securitization channels.136 FHFA has given the GSEs permission to
implement their chattel financing initiatives as pilot programs.137 Despite having experience with
securitizing manufactured homes titled as real property, Freddie Mac is stil gathering data and
conducting research to support the future securitization of loans backed by chattel properties.138
The Federal Home Loan Bank System and Chattel Loans
The Federal Home Loan Bank (FHLB) System, which is a housing GSE with an affordable housing mission and
supervised by FHFA, has addressed issues pertaining to the higher levels of default risk associated with chattel
loans.139 Lenders may face limitations obtaining advances (short-term loans) from some of the FHLBs using chattel
loans as col ateral, as different FHLBs may have separate policies.140 FHFA, however, al ows the FHLBs to purchase
chattel loans under their Acquired Member Assets programs although they have made few if any such purcha ses
from member financial institutions.141
FHFA also considers manufactured housing to contain higher credit and liquidity risks. In the
final rule establishing the GSEs’ heightened capital requirements, the manufactured home loan
category is assigned one of the higher risk weights relative to other types of mortgages. If the

135 See Fannie Mae, “Duty to Serve Underserved Markets Plan for the Manufactured Housing Market,” effective
January 1, 2021, p. 35, https://www.fhfa.gov/PolicyProgramsResearch/Programs/Documents/
FannieMaeDT SPlan_2018-2021.pdf.
136 See Fannie Mae, “Duty to Serve Underserved Markets Plan for the Manufactured Housing Market;” and Freddie
Mac, “Duty to Serve Underserved Markets Plan For 2018-2021,” https://www.fhfa.gov/PolicyProgramsResearch/
Programs/Documents/FreddieMacDT SPlan_2018-2021.pdf.
137 See FHFA, “Duty to Serve: FHFA Presents Snapshots from Freddie Mac’s and Fannie Mae’s Duty to Serve
Underserved Markets Plans for Chattel,” https://www.fhfa.gov/PolicyProgramsResearch/Programs/Documents/DTS-
Manufactured-Housing-Chattel.pdf.
138 See Freddie Mac, “Duty to Serve Underserved Markets Plan for 2018-2021,” https://www.fhfa.gov/
PolicyProgramsResearch/Programs/Documents/FreddieMacDT SPlan_2018-2021.pdf. Freddie Mac securitizes its
manufacturing housing loans as a m ultifam ily K-Deals products that have only default risk (and no prepayment risk),
similar to the credit risk transfers.
139 See CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E.
Getter.
140 T he FHLBs may require manufactured homes to be converted from personal property to real property before any
loan used to secure the property can be used as collateral for a loan to its member lending institutions. For example, see
FHLB of Atlanta, FHLBank Atlanta: Loan Collateral Resource Guide, http://corp.fhlbatl.com/files/documents/loan -
117 Large-scale operations such as the Enterprises may not have the volume of similar chattel loans necessary to offer pools for securitizations. See Fannie Mae, Duty to Serve Underserved Markets Plan, revised January 9, 2024, https://www.freddiemac.com/sites/g/files/ynjofi111/files/about/duty-to-serve/docs/Freddie-Mac-Underserved-Markets-Plan.pdf. Congressional Research Service 20 Fannie Mae and Freddie Mac: Recent Administrative Developments Fannie Mae and Freddie Mac are developing plans to provide liquidity for manufactured housing titled as chattel through securitization channels.118 FHFA has given the Enterprises permission to implement their chattel financing initiatives as pilot programs.119 Nevertheless, FHFA also considers manufactured housing to contain higher credit and liquidity risks. In the final rule establishing the Enterprises’ heightened capital requirements, the manufactured home loan category is assigned one of the higher risk weights relative to other types of mortgages. If the Enterprises enter into the chattel lending markets, FHFA might introduce a separate risk weight that could be higher than the current risk weight for manufactured homes titled as real property. The Federal Home Loan Bank System and Chattel Loans The Federal Home Loan Bank (FHLB) System, which is also a housing GSE with an affordable housing mission that is supervised by FHFA, has addressed issues pertaining to the higher levels of default risk associated with chattel loans.120 Lenders may face limitations obtaining advances (short-term loans) from some of the FHLBs using chattel loans as col ateral, as different FHLBs may have separate policies.121 FHFA, however, allows the FHLBs to purchase chattel loans under their Acquired Member Assets programs, although they have made few if any such purchases from member financial institutions.122 Author Information Darryl E. Getter Specialist in Financial Economics 118 See Fannie Mae, “What Is Duty to Serve?,” https://www.fanniemae.com/media/45201/display; and Freddie Mac, “Duty to Serve,” https://sf.freddiemac.com/working-with-us/affordable-lending/duty-to-serve/overview. 119 See FHFA, “Enterprise Duty to Serve Underserved Markets,” 81 Federal Register 96242-96301, December 29, 2016. 120 See CRS Report R46499, The Federal Home Loan Bank (FHLB) System and Selected Policy Issues, by Darryl E. Getter. 121 The FHLBs may require a manufactured home to be converted from personal property to real property before any loan to secure the property can be used as collateral for a loan to its member lending institutions. For example, see FHLBank Atlanta, Loan Collateral Resource Guide, http://corp.fhlbatl.com/files/documents/loan-collateral-resource-guide.pdf. collateral-resource-guide.pdf.
141122 See See FHFA, “Federal Home Loan Bank HousingFHFA, “Federal Home Loan Bank Housing Goals Goals Amendments Final Rule,”Amendments Final Rule,” June June 25, 2020, 25, 2020,
https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Federal-Home-Loan-Bank-Housing-Goals-Amendments-https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Federal-Home-Loan-Bank-Housing-Goals-Amendments-
Final-Rule.aspx. Final-Rule.aspx. T heThe Mortgage Purchase Program and the Mortgage Partnership Finance Program are two Mortgage Purchase Program and the Mortgage Partnership Finance Program are two typ estypes of of
AcquiredAcquired Member Assets programs. For more information, see FHFA, “Fact Sheet: Final RuleMember Assets programs. For more information, see FHFA, “Fact Sheet: Final Rule on Federal Home Loan on Federal Home Loan
Bank HousingBank Housing Goals,” https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/FHLBankGoals,” https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/FHLBank -Housing-Goals--Housing-Goals-
FactFact -Sheet-Final-rule.pdf. -Sheet-Final-rule.pdf.
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GSEs enter into the chattel lending markets, FHFA might introduce a separate risk weight that
could be higher than the current risk weight for manufactured homes titled as real property.
Author Information

Darryl E. Getter

Specialist in Financial Economics



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