Fannie Mae’s and Freddie Mac’s Voluntary Initiatives: Lessons from Banking W. SCOTT FRAME AND LARRY D. WALL

Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W First Quarter 2002 T he federal government created the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) to enhance the availability of mortgage credit by providing stability and liquidity to the secondary mortgage market. These government-sponsored enterprises (GSEs) have become significant players in the mortgage markets generally and dominate the “conforming” mortgage market. Their size and mission have given the federal government an ongoing interest in their financial stability. In terms of asset size, if both GSEs were bank holding companies, Fannie Mae would be the second-largest banking organization in the United States, and Freddie Mac would be the fifthlargest (as of the end of the third quarter of 2001). Moreover, with the diminished issuance of U.S. Treasury securities in recent years, Fannie Mae and Freddie Mac are trying to establish “benchmark” debt issues that can be used by investors for pricing other securities and as hedging instruments. To the extent that the GSEs are successful, these efforts would not only reduce their financing costs but also add to their importance to financial markets. The government’s interest in Fannie Mae and Freddie Mac is not limited to their important role to financial markets. Like the largest commercial banks, the GSEs are thought by many investors to benefit from an implicit government guarantee. That is, if Fannie Mae’s and Freddie Mac’s Voluntary Initiatives: Lessons from Banking