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18 THE FATE OF FANNIE AND FREDDIE AND THE IMPORTANCE OF GSE REFORM Congress chartered Fannie Mae in 1938 as part of the New Deal and Freddie Mac in 1970. Although they were chartered by the federal government, the corporations were owned by private shareholders for the purpose of making homeownership affordable for lower middle- class and other underserved Americans. In theory, the GSEs purchase mortgages from lenders, guarantee them, and package them into mortgage-backed securities, which they either keep as investments or sell to institutional investors. Lenders are able to increase liquid- ity and lending potential by selling loans to the GSEs, which in turn should increase availability of credit. In practice, they have dominated the mort- gage finance market, and promoted homeowner- ship. is domination is attributed to the ability of the GSEs to buy mortgages by borrowing at below-market rates based on the illusion of a government guarantee. In the 1990s, the GSEs implemented housing initiatives to encourage lenders to offer low- down-payment mortgages to low- and middle- income families and to loosen underwriting guidelines, both factors that contributed to the housing bubble. In the early 2000s, Wall Street increased the quantity of loans—often non-GSE, riskier loans that were securitized, another factor contribut- ing to the bubble. By 2005, the GSEs, which were losing market share, loosened underwrit- ing guidelines, taking on more risk without an increase in capital reserves. As the bubble began bursting in 2008, some in Congress wanted the GSEs to take on more risk, but U.S. Treasury officials, alarmed by continued devaluation of GSE loan portfolios, GSE's weak capital reserves, potential investor sell-off, and impact on global markets—per- suaded the GSEs to consent to conservatorship in September 2008. e Housing and Economic Recovery Act (HERA), enacted in July 2008, created the Federal Housing Finance Agency (FHFA), the GSEs' conservator since 2008. Fannie and Freddie continue to dominate the secondary mortgage market: ey currently have more than $5.6 trillion in obligations outstand- ing, an amount nearly 40 percent the size of the entire U.S. economy, and they owned or guaranteed about 61 percent of all new residential mortgage loans in the United States in 2012. In contrast, only $5.2 billion in residential mort- gage-backed securities have been issued without government support in the same time period. IMPORTANCE OF GSE REFORM Freddie and Fannie received a $188 billion bailout from Treasury and had paid $146 billion back by September 2013, with two-thirds paid back this year. ey continue to be profit- able, while having increased lender fees and tightened underwriting guidelines, and, along with the Federal Housing Administration (FHA), which guarantees reverse mortgages to seniors, insure nearly 90 percent of all residen- tial mortgages. e costs beyond the direct infusion of the $188 billion bailout are much higher: an As a part of the New Deal, Franklin Delano Roosevelt signed legislation that would expand the secondary market through secu- ritization of mortgage backed securities. He named the entity the Federal National Mortgage Association (FNMA), also known as Fannie Mae. Today, Fannie Mae's fate hangs in the balance as regulators decide on the best course of action.