Fannie Mae and Freddie Mac: Recent Administrative Developments

April 5, 2021 – July 19, 2024 R46746

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

multifamily (apartment and condominium) construction. After purchasing pools of single-family
30-year fixed rate mortgages, the Enterprises retain the credit (default) risks from the whole

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 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 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 mortgages). National mortgage rates
tend to fall as the supply of funds in this market increases, making homeownership more affordable.
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), is the Enterprises’ primary regulator. FHFA regulates the Enterprises for
prudential safety and soundness and to ensure that they meet their affordable housing mission goals. In September 2008, the
Enterprises experienced losses that exceeded their statutory minimum capital requirement levels as a result of above-normal
mortgage defaults. The Enterprises also experienced losses following spikes in short-term borrowing rates that occurred
while they were funding long-term assets held in their portfolios. The Enterprises were subsequently placed into
conservatorship by FHFA, which currently has the powers of management, boards, and shareholders until the Enterprises’
financial safety and soundness can be restored. In addition, the U.S. Treasury provides financial support through the senior
preferred stock purchase agreements (PSPAs), which stipulate that the Enterprises 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 Enterprises to retain their earnings for the purpose of accumulating capital reserves in
preparation for eventual release from conservatorship.
Congressional interest in the Enterprises 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 Enterprises financial support are unknown. In addition, the
Enterprises’ future 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 liquid mortgages for several decades. Congressional interest has been reflected by various draft proposals,
bills, and oversight hearings on housing finance reform. During the 118th 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.
Meanwhile, FHFA’s conservatorship goals have focused primarily on managing the Enterprises’ liquidity, operational, and
credit risks. FHFA has directed the Enterprises to standardize numerous processes to foster greater liquidity in the market for
their MBSs. The Enterprises 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 fostering efficient operation of the primary and secondary mortgage markets.
On October 28, 2019, FHFA announced a strategic plan to prepare the Enterprises for their eventual exit from
conservatorship. FHFA also adopted a final rule on December 17, 2020, that establishes a capital regulatory framework for
the Enterprises to be in place once they exit conservatorship. The capitalization requirements are designed to increase the
Enterprises’ resiliency to another severe financial downturn. Furthermore, FHFA directs the Enterprises 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 Enterprises’ activities in the multifamily (e.g., apartments) lending space that are not
explicitly linked to their affordable mission goals. If the Enterprises 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 dilemma.
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Fannie Mae and Freddie Mac: Recent Administrative Developments

Introduction
Congress chartered Fannie Mae and Freddie Mac, also known collectively as Enterprises,1 to
promote homeownership by providing liquidity to the secondary markets for single-family
residential mortgages and multifamily (apartment and condominium) mortgages. Guaranteeing
the credit (default) risk linked to single-family residential mortgages is their core business
activity. Specifically, the Enterprises retain the credit risks from the mortgages they purchase
from loan originators and subsequently issue bond-like instruments known as mortgage-backed
securities (MBSs).2 Investors who purchase the MBSs are guaranteed to get their initial principal
investment returned, but they assume the risk of declining cash flows if borrowers repay their
mortgages ahead of schedule, referred to as prepayment risk.3 Hence, unlike mortgages with both
prepayment and default risks, MBSs are more liquid (e.g., they can be traded or sold for cash
more quickly) largely because only one type of lending risk is attached. Thus, MBSs can attract
private sector funds that can be used to offer relatively less liquid mortgages—namely 30-year
fixed-rate mortgages. National mortgage rates tend to fall as the supply of funds in the MBS
market increases, making U.S. homeownership more affordable.
The Federal Housing Finance Agency (FHFA), an independent federal agency created by the
Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289), is the Enterprises’ primary
regulator.4 FHFA regulates the Enterprises for prudential safety and soundness and ensures they
meet their affordable housing mission goals. In September 2008, the Enterprises experienced
losses that exceeded their statutory minimum capital requirement levels due to the high rate of
mortgage defaults. At the same time, the Enterprises also experienced losses following spikes in
short-term borrowing rates that occurred while they were funding long-term assets held in their
portfolios. The Enterprises subsequently agreed to be placed under conservatorship, meaning that
FHFA has the powers of management, boards, and shareholders until restoration of the
Enterprises’ financial safety and soundness.5 The terms in the senior preferred stock purchase
agreements (PSPAs) between the Enterprises and the U.S. Treasury stipulate the conditions under
which it will provide them with financial support while they are under conservatorship.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 Loan Bank System and the Farm Credit System are also GSEs.
2 Fannie Mae calls its securities MBSs, and Freddie Mac calls its securities participation certificates. Common industry
practice is to refer to both Fannie’s MBSs and Freddie’s participation certificates collectively as MBSs.
3 In addition to Fannie Mae and Freddie Mac, Congress created Ginnie Mae, a federal corporation that guarantees the
timely repayment of principal and interest to investors in MBSs (created by Ginnie Mae–approved issuers) linked to
mortgages in which the default risk has already been guaranteed by federal agencies, such as the Federal Housing
Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture
(USDA). Hence, Ginnie Mae does not retain credit risk.
4 Prior to FHFA’s creation, the Office of Federal Housing Enterprise Oversight (OFHEO), which was an agency under
the Department of Housing and Urban Development (HUD), was the safety and soundness regulator for Fannie Mae
and Freddie Mac. OFHEO ensured that the Enterprises complied with their statutory capital requirements. The
Enterprises’ annual housing mission goals were set by HUD but not by OFHEO.
5 See FHFA, “Conservatorship,” https://www.fhfa.gov/Conservatorship.
6 P.L. 110-289 gave the Treasury Secretary authority to lend or invest in the Enterprises. The Treasury’s response to the
Enterprises after they were undercapitalized was similar to its response after the banking system became
undercapitalized, in which it purchased preferred shares from the banks via the Troubled 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.
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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 since they were placed in conservatorship has continued
due to uncertainty in the housing, mortgage, and financial markets. For example, whether
Treasury may have to provide additional financial support to the Enterprises is difficult to predict.
In addition, reforming or replacing the Enterprises might affect the availability of single-family
30-year fixed-rate mortgage loan products, which are arguably more popular with 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 draft
proposals, bills, 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 the management
of the Enterprises’ credit and liquidity risks. The directives specifically focus on 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 capital reserves to prepare for
their exit from conservatorship. Finally, this report discusses how the Enterprises may operate
following their conservatorships.
Enterprises’ Secondary Mortgage Market Activities
By law, the Enterprises cannot originate mortgages directly to borrowers, who obtain their
mortgages from loan originators in the primary market. Instead, the Enterprises operate in the
secondary mortgage market, interacting with loan originators (which sell mortgages to the
Enterprises) and investors (which purchase the Enterprises’ debt and MBS issuances). 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’ conforming mortgages from loan
originators. Conforming mortgages are single-family mortgages that meet certain eligibility
criteria set by the Enterprises based on size and creditworthiness.10 These mortgages must meet
the Enterprises’ underwriting standards and cannot exceed the conforming loan limit, which is
adjusted each 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 local house value exceeds the national average house value by 115%, the conforming loan limit is set at 115%
of the median home value. FHFA establishes separate conforming loan limit for Alaska, Hawaii, Guam, and the U.S.
Virgin Islands.
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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’ regular payments, resolves borrower delinquency and
default problems, and disburses payments to the Enterprises (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 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
MBS.
The Enterprises’ profits are related to lending spreads—the difference between lending at higher
rates and borrowing at successive sequences of shorter rates—created to finance assets retained in
their lending portfolios (on-balance sheet) and the conforming mortgages held in the MBS trusts
(off-balance sheet). For the on-balance-sheet assets retained in their portfolios, the Enterprises
issue to investors debt securities—referred to as unsecured debentures—with shorter maturities
relative to the longer-term assets. By borrowing via successive sequences of lower-rate
debentures, the Enterprises create portfolio lending spreads. For 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 FHFA, “Enterprise Capital Requirements,” 83
Federal Register 137, July 17, 2018. Bond insurers guarantee (for a fee) that the interest payment streams generated
from a bond (or loan) will be made on time and that, if a default occurs, the initial principal investment will be returned
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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 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 (for the amount of the remaining balance owed) out of the MBS trust.18 After
a borrower defaults, the purchase effectively reimburses the associated MBS trust and, therefore,
prevents MBS investors from losing their initial 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 ahead 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 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.
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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, without affecting
their quoted prices. Investors arguably might offer (bid) “too much” to buy or sell (ask) for a
price “too low” when trading illiquid securities. Consequently, investors require additional
compensation, referred to as a liquidity premium, to buy or sell illiquid securities.24 Widening bid-
ask spreads might signal the emergence of a liquidity premium being incorporated 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, “Market Liquidity: A Primer,” Brookings Institution, June 2015, https://www.brookings.edu/
wp-content/uploads/2016/07/Market-Liquidity.pdf.
25 See Rich Podjasek et al., “Has MBS Market Liquidity Deteriorated?,” Federal Reserve Bank of New York, February
8, 2016, https://libertystreeteconomics.newyorkfed.org/2016/02/has-mbs-market-liquidity-deteriorated.html.
26 Whether investors found MBSs attractive due to their lack of credit risk or their OTC market liquidity is subject to
debate. See James Vickery and Joshua Wright, TBA Trading and Liquidity in the Agency MBS Market, Federal Reserve
Bank of New York, May 2013, http://www.newyorkfed.org/research/epr/2013/1212vick.pdf.
27 See Scott Richardson and Diogo Palhares, “(Il)liquidity Premium in Credit Markets: A Myth?,” Journal of Fixed
Income, vol. 28, no. 3 (Winter 2019), pp. 3-21.
28 See Congressional Budget 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-
fanniefreddie.pdf.
29 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.
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Although the Federal Reserve has purchased large amounts of the Enterprises’ MBS while
carrying out its lender-of-last-resort responsibilities, it has largely retained them in its asset
portfolio rather than actively trading them.32 Hence, less active trading of MBSs by the
Enterprises and more holding (rather than actively trading) of MBSs by the Federal Reserve
might explain declines in market liquidity observed prior to the COVID-19 pandemic.33
FHFA’s Conservatorship Priorities
Since conservatorship, FHFA has released various versions of strategic plans and performance
goals.34 FHFA has focused primarily on (1) reducing the credit risks (which pose a direct risk to
U.S. taxpayers) retained by the Enterprises and (2) increasing the liquidity of their MBS
issuances. The directives that focus on those risks are highlighted in this section.
Directives to Reduce the Enterprises’ Credit Risks
The PSPAs required the Enterprises to reduce taxpayers’ credit risk. Various programs to facilitate
the Enterprises’ credit risk management are discussed in this section.
Loan-to-Value Ratios and Mortgage Reinsurance Transactions
By statute, additional credit risk reduction measures are required if the Enterprises purchase
mortgages with loan-to-value ratios (LTVs) above 80%, meaning that the mortgage balance
exceeds 80% of the residential property value.35 If a borrower defaults, the Enterprise generally
recovers losses by foreclosing (repossessing) and then liquidating (selling) the property. If a
repossessed property sells for at least 80% of its original value, then the 80% LTV requirement
increases the likelihood that an Enterprise 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 Board of Governors of the Federal Reserve System, “Authority to Lend to Fannie Mae and Freddie Mac,” press
release, July 13, 2008, http://www.federalreserve.gov/newsevents/press/other/20080713a.htm.
33 Kaul and Goodman, “Declining Agency MBS Liquidity.”
34 FHFA issues annual scorecards, which communicate the annual priorities and expectations that it sets for the
Enterprises with respect to both of their single-family and multifamily mortgage businesses while under
conservatorship. See FHFA, “Conservatorship.”
35 12 U.S.C. §1717.
36 The property value would have been determined by an appraisal when the mortgage was originated. Property values,
however, are not constant and might increase or decrease by the time a borrower officially defaults. The Enterprises’
definition of default is 120 days delinquent. A loss 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 below the outstanding mortgage
balance, 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,
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The Enterprises introduced additional methods to facilitate the transfer of credit risk stemming
from low-down-payment borrowers referred to as mortgage reinsurance transactions. In their
pilot programs, the Enterprises initially paid the mortgage insurance premiums upfront and were
reimbursed later by borrowers via interest rate adjustments on their loans, thus streamlining the
origination process for some borrowers in need of private mortgage insurance. Fannie Mae’s pilot
program, the Enterprise-Paid Mortgage Insurance Option, and Freddie Mac’s pilot 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,
https://www.fhfaoig.gov/Content/Files/WPR-2018-002.pdf.
39 See FHFA, Office of the Inspector General, Enterprise Counterparties: Reinsurers, September 27, 2021,
https://www.fhfaoig.gov/sites/default/files/WPR-2021-007.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.
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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 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.47 Both
Enterprises now offer CRT financial instruments that are linked only to the credit risk of the
single-family mortgages held in the MBS trusts.48 Investors preferring exposure only to mortgage
prepayment risk 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.
The Enterprises transfer to investors the credit risk linked to mortgages with LTVs greater than
60% (or borrowers with 40% or less in accumulated home equity, making them more vulnerable
to the possibility of owing more than the initial value of their homes if housing market prices
were to fall).49 After defaults occur, the Enterprises write down the coupons paid to CRT investors
(similar to adjusting the MBS coupons downward after prepayments occur).50 The Enterprises
retain the credit risk for mortgages with lower 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), which are less likely to default.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 programs. For more information, see the section of this report entitled “The Enterprises’ Multifamily
Business Models.”
48 See FHFA, Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions, August 2015,
https://www.fhfa.gov/sites/default/files/2023-03/CRT-Overview-8-21-2015.pdf.
49 See FHFA, Performance and Accountability Report: FY2018, https://www.fhfa.gov/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
the standardized features that would make them eligible for placement into an MBS trust for securitization).
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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 to occur during periods of stable housing market conditions when some borrowers fail to repay
their mortgages, perhaps due to unforeseen life circumstances (e.g., job loss, disability, divorce). The first-loss
tranche absorbs 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 events, such as a recession. The mezzanine tranches
col ectively absorb mortgage credit risk after 5% and up to 45% of total credit losses linked to mortgages held
in MBS trusts. For the mezzanine tranches, the credit risk is distributed as fol ows:53 The Enterprises retain
5% of all mezzanine tranche risk. The private sector retains 60% of mezzanine risk via purchases of the
Enterprises’ CRT issuances. For the remaining 35% of mezzanine risk, the Enterprises rely upon another set
of CRT risk-sharing programs in which they directly obtain insurance or reinsurance.54 Just as the Enterprises
charge g-fees, they pay credit insurance premiums to insurance and reinsurance firms to assume a
predetermined dol ar amount of the credit risk.55 Fannie Mae’s program is known as Credit Insurance Risk
Transfer; Freddie Mac’s corresponding program is known as Agency Credit Insurance Structure. Participating
institutions, primarily insurers and reinsurers, may use proceeds from these programs to diversify their
portfolios if they have assets that are not highly correlated to U.S. residential mortgage credit risk.
•
The Enterprises retain all of the senior-tranche risk, which contains catastrophic credit loss risk. Catastrophic
credit losses are those linked to catastrophic events with historically low probabilities of occurrence. The
senior tranche absorbs credit losses after the mezzanine and first-loss tranches have absorbed the initial 45%
of the 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 another insurance company.
56 FHFA acknowledges that a bright line distinction between unexpected and catastrophic loss risk has yet to be
defined. The distinction between risk types, however, may not be pertinent, because credit risk is measured in basis
points, and the total amounts transferred to the private sector occur after certain basis point thresholds.
57 See Joshua D. Coval, Jakub W. Jurek, and Erik Stafford, “Economic Catastrophic Bonds,” American Economic
Review, vol. 99, no. 3 (June 2009), pp. 628-666.
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.
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Standardization Initiatives to Foster MBS Liquidity
FHFA introduced initiatives to standardize many aspects of the Enterprises’ operations, which
include their mortgage data collection processes, securitization processes, mortgage servicing
guidelines (e.g., resolving delinquencies), and MBS issuances. Greater uniformity is expected to
provide greater data integrity for appraisers, servicers, and secondary-market investors. Such
standardization may increase transparency, reduce the length of the single-family mortgage
origination and securitization processes, and ultimately increase the uniform pricing and liquidity
of the Enterprises’ MBS and CRT issuances.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.60 Data on loan applications, property appraisals, loan closings, and disclosures are the
focus of the standardization efforts. Mortgage originators must prepare more standardized and
streamlined mortgage loan packages that 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/
default/files/publication/99317/uniform_mortgage_servicing_data_standards_0.pdf. The standardization of servicing
may enhance the attractiveness of CRT investments by clarifying the procedures for handling nonperforming
mortgages, thus clarifying how losses will be distributed among the various tranche classes. For more information, see
Basel Committee on Banking Supervision: The Joint Forum, Report on Asset Securitisation Incentives, July 2011,
https://www.bis.org/publ/joint26.pdf; and Patricia A. McCoy, “Barriers to Federal Home Mortgage Modification
Efforts During the Financial Crisis,” Harvard University Joint Center for Housing Studies, August 2010,
https://www.jchs.harvard.edu/sites/default/files/mf10-6.pdf.
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...)
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• 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,
https://www.fhfa.gov/research/papers/building-new-infrastructure-secondary-mortgage-market.
68 See FHFA, 2015 Scorecard Progress Report, March 2016, p. 24, https://www.fhfa.gov/sites/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.
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• The Enterprises purchase mortgages from originators, establish separate loss
mitigation practices for delinquent and defaulted mortgages 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 individually
create.
• The CSP facilitates the initial issuance of MBSs to investors. After receiving a
securitization request from an Enterprise, the CSP validates the details related to
the MBS trust and linked MBSs that will be issued to investors (e.g., confirming
the mortgages held in an MBS trust, confirming the average principal and interest
payment amounts as well as the maturity on the linked MBSs, and confirming the
identification code on the security used to facilitate clearing and settlement of
trades). Common Securitization Solutions notifies the Enterprises of any data
inconsistencies.
• The CSP releases required disclosures for MBS investors. Data about MBSs is
sent to the Federal Reserve Bank of New York or the Depository Trust and
Clearing Corporation—typically two days before issuance, allowing information
about MBSs to be disclosed to market participants—which facilitate the transfer
of MBSs to investors in exchange for cash. The CSP confirms issuance and
payment information back to the issuing Enterprise.
• The CSP provides ongoing administration of MBSs for investors. For example,
the CSP calculates repayments of principal and interest to MBS holders for tax
reporting purposes. The CSP provides monthly updates about the prepayment
status of the underlying collateral to ensure that investors have current
disclosures about information relevant to the linked MBS’s performance.
Uniform MBS Single Security Initiative
In the TBA market, a loan originator selling mortgages to the Enterprises contracts to deliver
mortgages in exchange for an MBS at a specified future date. Specifically, the MBS buyer (loan
originator) and MBS seller (one of the Enterprises) negotiates in advance for future delivery and
settlement date for the trade. The buyer and seller agree on six general features that the MBS
should have: the issuer, maturity, coupon rate, sale price, approximate face value, and settlement
date.70 The exact features of the securities to be delivered are disclosed to the participants two
days prior to delivery and settlement.
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
of the trading features, MBSs have generally been fungible only with other MBSs issued by the
same Enterprise. 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
Enterprises have essentially the same federal charters and business (securitization) models.71
Prior to the single security initiative, Freddie Mac’s MBSs frequently traded at lower prices
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.
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borrowers to refinance, the mortgage pools underlying Freddie Mac’s MBSs historically had
faster prepayment rates (relative 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 originator could subsequently enter into a swap agreement with
Fannie Mae to acquire a higher-priced MBS (compared to Freddie Mac) and immediately resell it
in the OTC market. Freddie 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 issuances were approximately 70% of Fannie Mae’s MBS
issuances, and Freddie Mac’s MBSs accounted for 9% of total trading activity in 2014.73 Hence,
the pricing differential between the Enterprises’ MBSs provided Fannie Mae a competitive
advantage in the secondary market over Freddie Mac as well as other prospective private sector
securitizers.74
Under the single security initiative, FHFA has directed the Enterprises to align their key
contractual and business practices by acquiring mortgages with similar prepayment speeds along
with other features.75 The Enterprises may continue to separately purchase conforming mortgages
and guarantee the credit risks linked to the MBS trusts they create. Nevertheless, harmonizing the
financial characteristics of their mortgage purchases would allow the Enterprises’ MBS trusts to
generate similar cash flow predictability and prepayment speeds, thus facilitating the creation of
uniform and fungible securities when issued through the CSP. The Enterprises would be required
to align their prepayment speeds such that they do not constitute a material misalignment or a
divergence by more than 2% over a three-month interval.76
Rather than separate MBS issuances (i.e., Fannie Mae’s MBS and Freddie Mac’s participation
certificates), FHFA has directed the Enterprises (via the CSP) to issue one common security, the
uniform mortgage-backed security (UMBSs). (Private sector guarantors would also be able to use
the CSP to issue fungible UMBSs.) FHFA argues that a combined market for the Enterprises’
UMBSs would enhance market liquidity and mitigate the rise of market liquidity premiums. The
pricing differential would also be eliminated.77 FHFA monitors both Enterprises to avoid material
misalignment that compromises UMBS fungibility.78 UMBS issuances began on June 3, 2019.79

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, An Update on the Structure of the Single Security, May 15, 2015, p. 4, https://www.fhfa.gov/AboutUs/
Reports/ReportDocuments/Single%20Security%20Update%20final.pdf. For a discussion on the effects of
standardization in the mortgage and MBS markets, see Adam J. Levitin and Susan M. Wachter, “Explaining the
Housing Bubble,” Georgetown Law Journal, vol. 100, no. 4 (April 12, 2012), pp. 1177-1258.
78 The Securities Industry and Financial Markets Association (SIFMA)—a trade association for broker-dealers,
investment banks, and asset managers operating in the United States and global capital markets—advocates for
legislative, regulatory, and business policies on behalf of their members. SIFMA sets the TBA trading conventions,
which includes the TBA settlement guidelines known as the Uniform Practices for the Clearance and Settlement of
Mortgage-Backed Securities and Other Related Securities. SIFMA recommends that FHFA, while regulating the
mortgage purchasing and trust structuring activities, ensure that the Enterprises do not deviate from the requirements to
securitize mortgage originations with standardized borrower characteristics.
79 See FHFA, “Statement of FHFA Deputy Director Robert Fishman on the Launch of the New Uniform Mortgage-
Backed Security (UMBS),” press release, June 3, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-
FHFA-Deputy-Director-Robert-Fishman-on-the-launch-of-the-new-Uniform-Mortgage-Backed-Security.aspx.
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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 housing for low-income families, including homeless families.80 The CMF awards competitive
grants to financial institutions designated as Community Development Financial Institutions and qualified nonprofit
housing organizations for which the development or management of affordable housing is one of their principal
purposes.81 The Enterprises must set aside 4.2 basis points (0.042%) of the unpaid principal balance of mortgages
purchased in a year for these funds. 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
Although the precise definitions of capital for financial firms is typically determined by laws and
regulations, it generally refers to common or preferred equity shareholders (as a percentage of
assets) and retained earnings, which can absorb financial losses. For the Enterprises, the statutory
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-balance-
sheet (portfolio) assets and 0.45% of off-balance-sheet (MBS trust) obligations. HERA gave
FHFA the authority to increase capital standards above the statutory minimum as necessary.
FHFA suspended the Enterprises’ capital requirements during conservatorship, as initially
required by the PSPAs with Treasury. The 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 After estimating the median family income for designated counties and metropolitan areas, HUD provides annual
definitions for extremely low-income family and very low-income family, which are used to determine eligibility for
various programs. See HUD, “Housing Trust Fund,” https://www.hudexchange.info/programs/htf/.
81 See U.S. Department of the Treasury, Community Development Financial Institutions Fund, “Capital Magnet Fund,”
https://www.cdfifund.gov/programs-training/Programs/cmf/Pages/default.aspx; and Department of the Treasury,
Community Development Financial Institutions Fund, “Funding Opportunities: Capital Magnet Fund; 2018 Funding
Round,” 83 Federal Register 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.
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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
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 FHFA, “Enterprise Regulatory Capital Framework,” 85 Federal Register 243, December 17, 2020.
86 If, for example, a sudden and significantly sharp decline in house prices generated widespread underwater mortgages
(held in MBS trusts and in their portfolios), the Enterprises’ capital buffers could be insufficient to allow them to
continue safe and sound operations. A mortgage is underwater when the home value declines far 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.
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Highlights of the Enterprise Regulatory Capital Framework
The supplemental capital requirements pertain to both an increase in the quantity of capital (from the statutory
P.L. 102-550 requirements) and the composition of the capital.89 The statutory and supplemental capital definitions
constitute the capital regulatory framework with the fol owing broad requirements:
•
An unweighted total leverage requirement (UNWLR) of 4% can be computed as the sum of a 2.5% statutory
leverage ratio requirement and a 1.5% prescribed leverage buffer 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 riskiness of the borrower. FHFA provides the risk weights for the single-family and multifamily
mortgage exposures depending upon various financial factors (e.g., current LTV, loan purpose, property type,
fixed or floating interest rate).90 Second, the risk-weighted asset (i.e., the product of the original asset
multiplied by the risk weight) is multiplied by 8%. Typically, the entire asset side of the balance sheet is risk
weighted, and then the risk-weighted assets are summed prior to applying the 8% capital charge. Third, the
PCCBA requirements, which adds modifications to the total capital ratio’s composition, are applied to
achieve the adjusted total capital ratio. 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, 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 its equity.91 The RWCR is designed to align proportionately with the
gradations of credit risk exposure, presuming accuracy of the risk-weighting system.92 The RWCR incorporates a
minimum common equity ratio requirement to ensure that it consists predominantly of common equity and
retained earnings, which have greater loss-absorbing capacity.
The size of the UNWLR relative to the RWCR has implications for a financial firm’s risk-taking behavior. For
example, when the UNWLR is lower relative to the RWCR, a financial firm has a greater incentive to vary the level
(i.e., scales of operation) of its risk exposure in proportion to its available capital.93 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 house prices and business cycles. Furthermore, if
recession fears prompt some common equity holders to liquidate their shares (in anticipation of greater mortgage
delinquencies and defaults), the Enterprises may react in accord by reducing loan purchases. Hence, the
Enterprises’ ability to function as a countercyclical macroeconomic buffer would be compromised if they were to
provide less liquidity to the mortgage market during recessionary periods.94
Alternatively, when the UNWLR equals or exceeds the RWCR, a financial firm has an incentive to alter the
composition of its risk exposure (via changing business strategies) particularly when its capital is comprised of
shareholders primarily focusing on return on equity (ROE). The 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 fails to keep pace with common equity requirements, the ROE may
decrease and become less financially attractive for shareholders. A financial firm is likely to respond by increasing
its risk exposure, customer fees, or both to boost the numerator and ultimately sustain more attractive ROE
levels. In other words, the Enterprises could choose to retain more credit risk (e.g., reducing junior and
mezzanine CRT issuances), increasing g-fees on mortgage borrowers, or both when UNWLR exceeds RWCR.
The ability to simultaneously 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 challenging without raising 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 movements
under different interest rate, housing market, and business cycle environments is challenging.

89 The final capital regulatory rule adopts terminology and definitions used in the banking capital regulatory framework
(continued...)
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The Enterprises’ Multifamily Business Models
A multifamily mortgage is a loan secured by a residential dwelling, such as an apartment
building, with at least five or more separate units. Multifamily real estate frequently refers to
properties used as residential dwellings, including traditional apartment buildings; subsidized
housing; housing for seniors (age-restricted, independent, and assisted living); and housing for
students (dormitories). 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.
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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 sector lender participation by offering
cheaper borrowing rates for multifamily loans.101 All multifamily mortgage purchases count
toward the cap—no exemptions or exclusions.102 In short, FHFA’s revised policy is designed to
prevent the Enterprises’ multifamily programs from growing without a more explicit link to
affordable rental units for low- and moderate-income and other historically underserved renters—
while making a reasonable economic return—rather than crowd out private sector lending
activities in market segments with less apparent credit gaps.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,
September 13, 2019, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Revises-Multifamily-Loan-Purchase-
Caps-for-Fannie-Mae-and-Freddie-Mac.aspx.
101 See FHFA, “Fannie Mae and Freddie Mac Multifamily Businesses,” https://www.fhfa.gov/
PolicyProgramsResearch/Policy/Pages/Reducing-Fannie-Mae—Freddie-Mac-Multifamily-Businesses.aspx.
102 For example, exemptions for multifamily loans used to finance energy and water improvements still count toward
the cap. See Kathleen Howley, “FHFA Moves to Curb Fannie Mae, Freddie Mac Green Loans for Multifamily:
Regulator Raises Lending Caps for GSEs but Ends the Energy-Efficiency Carve-Out,” Housingwire, September 13,
2019, https://www.housingwire.com/articles/50147-fhfa-moves-to-curb-fannie-mae-freddie-mac-green-loans-for-
multifamily/.
103 The Enterprises’ statutory public purpose includes an “affirmative obligation to facilitate the financing of affordable
housing for low- and moderate-income families in a manner consistent with their overall public purposes, while
maintaining a strong financial condition and a reasonable economic return.” See 12 U.S.C. §4501(7). Both Enterprise
charters authorize them to perform “activities relating to mortgages on housing for low- 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.
§§1451, 1716 note.
104 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.
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Prior to conservatorship, the Enterprises’ multifamily business activities were arguably diversified
such that cash flows from some lending activities could offset cash-flow disruptions stemming
from 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 cash flow disruptions. If FHFA’s requirements pertaining to multifamily caps were to
remain intact upon exit from conservatorship, the Enterprises’ multifamily portfolios may exhibit
greater cash flow volatility if a larger share of their multifamily lending activities are heavily
concentrated in certain mission-related activities.107 In other words, limiting the Enterprises’
involvement in certain activities may present a challenge for them to make an economic return
that shareholders would also find reasonable.
Duty to Serve: Manufactured Housing Chattel Loans
HERA created a duty to serve for the Enterprises with respect to three underserved markets:
manufactured housing, rural housing, and affordable housing preservation. 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 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 Housing and Urban Development.108 Mortgage
loans can be used to finance homes that are permanently attached to real property.109 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 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 cost-burdened, meaning
that their monthly housing (rent) costs exceed 30% of their income, then the rental income streams necessary to repay
loans may exhibit greater volatility, thus increasing the Enterprises’ cash-flow volatilities and loss risks. For more
information, see CRS Report R46480, Multifamily Housing Finance and Selected Policy Issues, by Darryl E. Getter.
108 By contrast, a manufactured home built before June 15, 1976, that does not meet HUD standards is referred to as a
mobile home. Few lenders are willing to provide loans to finance mobile homes. In contrast to mobile and
manufactured homes, a modular home is constructed to the same state, local, or regional building codes as site-built
homes. See HUD, “Frequently Asked Questions for On-Site Completion of Construction of Manufactured Homes,”
https://www.hud.gov/program_offices/housing/rmra/mhs/faqs. Moving a manufactured home from a permanent site to
another one may interfere with its loan financing. Thus, modular homes may be considered better investments. See
American Financing, “What Is a Chattel Mortgage?,” https://www.americanfinancing.net/mortgage-basics/chattel-
mortgage.
109 See Fannie Mae, “Key Legal Distinctions Between Manufactured Home Chattel Lending and Real Property
Lending,” 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.
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their duty-to-serve obligations contains substantial risks that may adversely affect their financial
results and conditions.112 Providing support for chattel loans includes the following challenges:
• Lenders generally show more willingness to provide loans for manufactured
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
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
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
lawsuit.113 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
must be moved to another site—adds more legal complications and expenses
likely to further reduce the amount of losses that may be recovered.114
• Manufactured homeowners typically pay higher annual percentage rates—the
total cost of a loan (both the interest rates and transaction fees)—for their loans in
comparison to site builders.115 The Enterprises have prohibited purchases of high-
cost loans that are consistent with their missions to facilitate affordable housing.
Certain consumer protections that exist when dwellings are attached to land,
however, do not apply to chattel loans. For example, the integrated disclosures
requiring lenders, mortgage brokers, or servicers of home loans to disclose loan
pricing information to borrowers do not apply when the dwelling is not attached
to land.116 Fewer disclosures may lead to greater uncertainty about the extent that
borrowers could have received cheaper 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 Fannie Mae, Form 10-K for the fiscal year ended December 31, 2019, p. 31, https://www.fanniemae.com/sites/
g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/quarterly-annual-results/2019/q42019.pdf; and Freddie Mac
Form 10-K for the fiscal year ended December 31, 2019, p. 152, https://www.freddiemac.com/investors/financials/pdf/
10k_021320.pdf.
113 See Justia, “Foreclosures of Manufactured Homes,” https://www.justia.com/foreclosure/foreclosures-of-
manufactured-homes/.
114 See Fannie Mae, “Key Legal Distinctions.”
115 According to the CFPB, a chattel loan may be priced between 50 and 500 basis points higher than a mortgage loan
for a manufactured home secured by real property. See CFPB, “Manufactured-Housing Consumer Finance.”
116 See CFPB, “CFPB Consumer Laws and Regulations: Regulation X Real Estate Settlement Procedures Act,”
https://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf.
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.
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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.
122 See FHFA, “Federal Home Loan Bank Housing Goals Amendments Final Rule,” June 25, 2020,
https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Federal-Home-Loan-Bank-Housing-Goals-Amendments-
Final-Rule.aspx. The Mortgage Purchase Program and the Mortgage Partnership Finance Program are two types of
Acquired Member Assets programs. For more information, see FHFA, “Fact Sheet: Final Rule on Federal Home Loan
Bank Housing Goals,” https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/FHLBank-Housing-Goals-
Fact-Sheet-Final-rule.pdf.
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Fannie Mae and Freddie Mac: Recent Administrative Developments

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