The Genius of the GSE Model: Attracting Private Capital for Public Purposes

One of the principal reasons for the success of the GSE model is that it attracts private capital to achieve a public purpose. Throughout our history, the government has sought to harness private enterprise and individual initiative to develop our nation, strengthen our economy and improve the lives of our people.¹ The housing GSEs fit solidly within this tradition.

Freddie Mac and Fannie Mae are federally-chartered corporations financed by the capital of private shareholders. Fannie Mae was created in 1938 to provide a secondary market for mortgages insured by the Federal Housing Administration (FHA). Originally chartered by the Depression-era Reconstruction Finance Corporation, Congress rechartered Fannie Mae in 1954 as an agency within the Housing and Home Finance Agency (the predecessor to today's Department of Housing and Urban Development). The 1954 Act contemplated that Fannie Mae would eventually become a privately-owned corporation, and accordingly, Congress required that Fannie Mae's operations were to be self-supporting and financed by private capital to the maximum extent possible.² Congress's vision of Fannie Mae becoming a privately-owned and financed company became reality in the 1968 Act that privatized Fannie Mae and created Ginnie Mae.³

Freddie Mac was created in 1970 to create a secondary market for mortgages originated by thrift institutions. Its board consisted of the members of the Federal Home Loan Bank Board (the predecessor to the Office of Thrift Supervision) and its initial capital consisted of contributions from the Federal Home Loan Banks, which became the shareholders. From its inception, Freddie Mac was designed to operate in a self-supporting manner. As part of its resolution of the thrift crisis in 1989, Congress created a corporate governance structure for Freddie Mac virtually identical to that of Fannie Mae. The preferred stock held by the FHLBs was converted into common stock, and since that time, Freddie Mac has been a shareholder-owned, publicly-traded corporation.

The shareholder-owned nature of the GSEs is reflected in our governance structures set forth in our charters. We have a federal charter that provides that our Board of Directors is responsible for the operation of the company. Our directors have the same common law and statutory duties of care, good faith and loyalty to the corporation and to its shareholders as the directors of any other private corporation.

The genius of the GSE model as it has evolved since the Great Depression is the ability to harness private capital as much as possible to promote the public purpose of a liquid secondary market for housing finance. To that end, within the context and confines of their charters, Congress has given the GSEs the freedom they needed to successfully compete for private capital and achieve attractive returns on that capital. Imposing too many conflicting demands on the GSEs risks crippling this highly successful model.

¹ Among the best known examples of this approach are the Erie Canal to spur development of the Midwest, railroad land grants to encourage creation of an advanced transportation system, the Homestead Act, which gave land to those willing to develop it, and the creation of what were essentially public-private partnerships to bring rural electric and telephone service throughout our nation.

² The act mandated two types of capital: preferred stock held by the Secretary of the Treasury and common stock issued to sellers of mortgages to Fannie Mae.

³ The 1968 Act provided for the retirement of the preferred stock held by Treasury and transfer of control of Fannie Mae's board of directors to its common stockholders. By 1970 both objectives were achieved, and Fannie Mae has since operated as a business corporation financed exclusively by private capital.