CASE STUDY #1: Fannie and Freddie
Instructions
Please read the mini-case study (Fannie and Freddie) on pages 167 – 168 in the Rubin text (The
Politics of Budgeting) and prepare a 3-page case analysis. Within your case analysis, please be sure
that you are identifying major issue(s) and/or benefits of Fannie and Freddie; determining the scope
of potential problems; and analyzing the issue(s) and the outcome(s) (do you agree; do you have
alternate recommendations etc.). It is recommended that you incorporate course material and
additional readings (i.e., journal articles, books, etc.) into your analysis to strengthen the content of
your paper. Within your analysis, please be sure to discuss two or more of the following main
learning objectives for this case within the analysis section of your paper:
Main Learning Objectives
· Think critically about the intersection between politics and Government- Sponsored Enterprises
(GSEs).
· Explore the benefits and drawbacks of GSEs.
· Articulate the effects that Fannie and Freddie have on society and taxpayers.
It is a good idea to organize your paper in at least 4 sections:
1.) Summary of the case (key players; background). Please include a
background/history of Fannie and Freddie in this section.
2.) Identify the scope of the problems with Fannie and Freddie.
3.) Analyze issues/outcomes.
4.) Recommendations.
Minicase Fannie and Freddie: Government Bailout, a Loan, or Investment?
The national government includes two huge government-sponsored enterprises (GSEs): the Federal
National Mortgage Association (FNMA), nicknamed Fannie Mae, and Freddie Mac, the Federal
Home Loan Mortgage Corporation (FHLMC). The goal of these two GSEs is to make more
mortgage money available to lend. They buy mortgages from commercial lenders. The commercial
lenders who sell their mortgages to Fannie and Freddie get their money back immediately rather than
over the life of the mortgage, and thus can relend it immediately. Over the years, these GSEs have
made money, requiring no taxpayer support, but they had implicit federal government and taxpayer
backing, which enabled them to borrow at below-market rates and improve their profitability.
In the 1970s and 1980s, Fannie and Freddie began to issue mortgage-backed securities; that is, they
bought mortgages, insured them, pooled them, and sold shares of the pool. They also held some of
the mortgages in their own portfolio.
As commercial lenders accepted more and more high-risk borrowers before the bubble in property
prices burst and as variable mortgage rates became more popular, Fannie and Freddie came to hold a
riskier portfolio. When the real estate market collapsed and the foreclosure rate skyrocketed, the
value of the portfolio declined. The GSEs had to make good on their guarantees to buyers of
mortgage-backed securities. Investors lost confidence: Shares of Fannie and Freddie tumbled more
than 90 percent in one year. Fears of undercapitalization led investors to worry that the GSEs might
declare bankruptcy.
In September 2008, the government took over both Fannie and Freddie. For now, a federal regulator
makes their business decisions. Estimates of the cost of the bailout have varied, but the figure
mentioned most often is about $187 billion. The implicit government backing of
