Fannie Mae and Freddie Mac grew rapidly during the housing and mortgage lending boom that began after the 2001 recession. During that boom the Enterprises’ combined share of residential mortgage debt outstanding reached its peak in 2003 (Chart 2). That growth slowed after Freddie Mac in 2003 and Fannie Mae in 2004 had to begin restating their earnings following the discovery of serious accounting, control, and other management weaknesses. In response to those discoveries, OFHEO increased the Enterprises’ minimum capital requirements to 30 percent more than the statutory minimum requirements. In 2006, we imposed limits on the size of their retained mortgage portfolios. The purpose of those actions was to create incentives for the Enterprises to remediate their weaknesses as rapidly as possible while limiting the risk they posed to taxpayers and the financial system. OFHEO also made sure that any private-label MBS that the Enterprises purchased for their portfolios almost always carried the highest credit ratings and took steps to inhibit the expansion of their holdings of securities backed by subprime mortgages. In retrospect, those supervisory constraints had the important benefit of limiting the growth of the Enterprises’ retained mortgage portfolios and the credit risk posed by their holdings of private-label MBS backed by subprime and nontraditional mortgages. If the limits had not been in place, Fannie Mae and Freddie Mac almost certainly would have had larger retained portfolios and fared far worse in recent quarters. Nonetheless, the house price and mortgage lending boom tended to increase the risks of Fannie Mae and Freddie Mac in several ways that are not difficult to discern today but were not widely appreciated during the boom. First, home price appreciation during the boom raised the average homeowner’s equity in his or her house, facilitating widespread equity withdrawals via cash-out refinances and home equity loans. Despite that borrower behavior, the Enterprises reported steadily improving current loan-to-value (LTV) ratios on mortgages they had previously purchased or guaranteed. At the same time, the risk of a sizable house price correction increased, especially after interest rates began rising in late 2005 and the housing sector weakened. That was true not just for properties financed with subprime and other nontraditional mortgages, whose prices appear to have appreciated especially rapidly, but also for properties financed with the prime conventional loans in which Fannie Mae and Freddie Mac specialize.