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CRS Report: Fannie Mae's and Freddie Mac's Financial Problems: Frequently Asked Questions

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RS22916 Fannie Mae’s and Freddie Mac’s Financial Problems: Frequently Asked Questions, July 15, 2008

  • “What risks do Fannie Mae and Freddie Mac face in today’s economic environment? Fannie Mae and Freddie Mac have traditionally kept some of their mortgages in their investment portfolios and packaged others for sale as mortgage-backed securities (MBS). The GSEs guarantee timely payment of principal and interest of the mortgages in their MBS. The GSEs finance their portfolios of long-term (typically 30 year) mortgages with short-term borrowing (typically three months to five years). This increases the GSEs’ profits because short-term borrowing is usually less expensive than longer term loans. This creates interest rate risk, which is the risk is that if short-term interest rates increase, profitability can be reduced or can even turn to losses. To try to reduce these risks, the GSEs use a variety of financial derivatives.”
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