More than six years after the federal government took control of Fannie Mae and Freddie Mac, policymakers are weighing a comprehensive overhaul of the mortgage finance system that could shrink or eventually close the two entities and create a system with more private capital. Fannie Mae and Freddie Mac were originally chartered as government-sponsored enterprises (GSEs) to ensure a stable supply of credit for residential mortgages nationwide.1 They operate in the secondary (or resale) market where they buy mortgages from the financial institutions that make the loans (thus ensuring that those institutions have a source of funds to originate new mortgages). Fannie Mae and Freddie Mac then pool those loans to create mortgage-backed securities (MBSs), which they guarantee against defaults on principal and interest payments by borrowers and sell to investors. Through its financial commitment to the two GSEs and its other mortgage programs, the federal government now directly or indirectly insures over 70 percent of all new residential mortgages. Loans guaranteed by Fannie Mae and Freddie Mac account for over two-thirds of those mortgages (about 50 percent of the total amount of mortgages), and loans insured by the Federal Housing Administration (FHA) make up most of the remaining federal share. Such government dominance was not always the case—in the 20 years before the financial crisis that began in 2007, roughly half of all mortgages were financed without backing from the federal government or either of the GSEs.

This report examines various mechanisms that policymakers could use to attract more private capital to the secondary mortgage market. The report also addresses how those mechanisms could be combined in different ways to help the market make the transition to a new structure during the coming decade. CBO analyzed transition paths to four alternative structures that involve choices about whether the government would continue to guarantee payment on mortgages and MBSs and, if so, what form and prices those guarantees would have.2 Under those different structures, the government’s activities would range from providing full or partial guarantees for a large share of the mortgage market to playing a minimal role in a largely private market (except perhaps during a financial crisis). Any transition to a new type of secondary market would also require decisions about what to do with the existing operations, guarantee obligations, and investment holdings of Fannie Mae and Freddie Mac.