The Fannie Mae and Freddie Mac bailout occurred as a result of the Subprime Mortgage Crisis. Although there were concerns last August that subprime mortgages could negatively affect Fannie and Freddie, no one thought they were seriously threatened. In early 2008, the Federal Reserve began guaranteeing loans to Bear Stearns and other banks to prevent an all-out financial failure. Soon Fannie and Freddie stepped in to guarantee more loans. However, Fannie and Freddie must answer to stockholders. When they panicked last week, the Feds realized they would need to step in to rescue Fannie and Freddie themselves.
An introductory article that shows how, even in August 2007, there were beginning to be concerns about the impact of subprime mortgages on Fannie Mae and Freddie Mac.
August 23, 2007 - A reader asked "What percentage of the secondary market is Fannie Mae? Is Fannie Mae in trouble, too, or is it just the “high risk” portion of the market?" At that time, subprime mortgages were only a small portion of the portfolio of Fannie Mae and her younger brother, Freddie Mac. They were not at risk of being capsized, despite concerns.
November 25, 2007 - The Economist reported in 2007 that Fannie's and Freddie's ability to pump liquidity in the market could be compromised. This was despite the fact that subprime mortgages were only a small portion of the agencies' portfolios.
March 17, 2008 - The Federal Reserve held the first emergency weekend meeting in 30 years to try and save investment bank Bear Stearns, which was in danger of going bankrupt thanks to bad mortgage-backed securities and other collateralized debt obligations. Without Fed intervention, the failure of Bear Stearns could have spread to other over-leveraged investment banks, including Merrill Lynch, Lehman and Citigroup.
March 23, 2008 - Federal regulators agreed to let Fannie Mae and Freddie Mac take on another $200 billion in subprime mortgage debt.
March 25, 2008 - The Federal Housing Finance Board agreed to let the regional Federal Home Loan Banks take an extra $100 billion in mortgage-backed securities for the next two years. The loans were guaranteed by Fannie Mae and Freddie Mac, who were allowed last week to take on an additional $200 billion in subprime mortgage debt.
April 7, 2008 - Fannie Mae, Freddie Mac and the Federal Home Loan Banks provided 90% of the financing for new mortgages at the end of 2007, according to the Office of Federal Housing Enterprise Oversight. This was more than double their normal percent of the mortgage market, revealing the extent to which private mortgage financing had dried up.
April 17, 2008 - Fannie Mae and Freddie Mac were made further commitments to help subprime mortgage holders keep their home. Fannie Mae developed a new effort called “HomeStay”, while Freddie modified its program called "HomePossible". That program gives borrowers ways to get out from under adjustable-rate loans before interest rates reset at a higher level and make monthly payments unaffordable.
July 22, 2008 - U.S. Treasury Secretary Henry Paulson is asking Congress to approve a bill on Wednesday that would allow the Treasury Department to guarantee as much as $25 billion in loans held by Fannie Mae and Freddie Mac. The two agencies themselves hold or guarantee more than $5 trillion, or half, of the nation's mortgages. Wall Street's fears that these loans will default have caused Fannie's and Freddie's shares to tumble, making it more difficult for the private companies to raise additional capital themselves.
