In September 2008, facing mounting losses and difficulty in rolling over their debt, Fannie Mae and Freddie Mac, also known as the government-sponsored enterprises, or GSEs, agreed to enter government conservatorship and have operated under government control ever since. Their losses through 2012 have been estimated at $300 billion. The role of the GSEs in the housing bubble and ensuing financial crisis has been a source of controversy. Did the GSEs precipitate the crisis? Or perhaps they merely amplified it? Can we quantify some of the benefits of the GSEs in more normal times and compare them with the losses during the crisis? Should the GSEs be phased out? Short of that, how should they be reformed?

To answer these questions, we present a brief history of the GSEs, summarize the benefits they provide to the housing market, and discuss how they lost market share during the boom and then recaptured it during the bust, leading to large losses. Finally, we discuss the advantages and disadvantages of the proposals that have been advanced to reform the GSEs.

This article appeared in the First Quarter 2015 edition of Business Review. Download and read the full issue.