Since their creation in 1938 and 1970 respectively, the Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corporation (Freddie) served the mortgage industry as private-public hybrid financial firms in that they operated under congressionally conferred charters, but at the same time were publicly traded corporations on the New York Stock Exchange. Fannie and Freddie did not originate mortgages directly. Rather they purchased “conforming mortgages” from lending institutions and transferred them into pools of mortgage-backed securities called collateralized mortgage obligation (CMO). Fannie and Freddie provided liquidity to the mortgage market under their “MBS Credit Guarantee Business” (Fannie MBS Swap Program and Freddie Guarantor Program). Fannie and Freddie Portfolio Investment Business held portfolios of assets that generated profits directly for their shareholders. Acceptable portfolio holdings included whole mortgages, Agency MBS, and private-label MBS, which increasingly included pools of subprime mortgage securities.
HUD prescribed affordable housing goals for Fannie: to “require that a reasonable portion of the corporation’s mortgage purchase be related to the national goal of providing adequate housing for low and moderate income families.” In 1991, a GAO report noted a need for increased regulatory oversight of Fannie and Freddie to ensure fulfillment of statutory purposes. Additionally, a Department of Treasury study found that, when compared to other financial institutions, Fannie and Freddie failed in satisfactorily achieving their mission of serving the mortgage needs of lower-income and traditionally underserved areas.
In 1992, President George H. W. Bush signed the Housing and Community Development Act of 1992 (GSE 1992). Title XIII of the Housing and Community Development Act of 1992 authorized the newly created Office of Federal Housing Enterprise Oversight (OFHEO), an independent entity within HUD, to set Fannie and Freddie capital requirements, conduct annual risk-based examinations, and generally “safety-and-soundness” oversight responsibilities.
In testimony before Congress, on April 13, 1994, HUD Secretary Henry Cisneros reported that both Fannie and Freddie have improved their overall performance with respect to the housing goals set in 1993. “But not all the goals have been met.” In 1995, Cisneros revised the “housing affordability goals” replacing the designation of “central city” with “underserved areas.” HUD established three “permanent” goals for the years 1996 to 1999. The percentage for low-and-moderate increased from 30 to 40 percent by 1996 and 42 percent for 1997 thru 1999. For the first time, Fannie and Freddie was allowed to count toward their affordable housing goal mortgage-related securities issued by other mortgage lenders, which Fannie and Freddie purchased and held in their investment portfolios. Fannie Mae Chairman James Johnson outlined the goals and accomplishments of this and other affordable home ownership programs in a speech at the National Press Club.