2008 Financial Crisis: What would have happened if Fannie Mae and Freddie Mac were not bailed out and nationalized?

You would have seen a complete and utter collapse of the US real estate market which would make the sub-prime defaults look tame by comparison. If and had gone out of business, we would have been entirely reliant on the private issued market for , and as noted in the chart below, we had a complete collapse in that market by 2008. One can argue that the government guarantee dried up the demand for private issued paper, but even in the pre-crisis/sub-prime bubble days, GSEs accounted for 80% of the market for mortgage-backed securities. During the time of the crisis, no one would have bought that paper, and it would have become close to impossible to get a mortgage anywhere. With no ability to finance a home purchases or refinance an existing loan, home values would have gone into free fall erasing tens of trillions in household wealth. GSEs remain a major long-term issue, but I'm glad that they were taken over by the government in those dark days. Otherwise, we would have been in a very deep world of hurt. Source: http://econlog.econlib.org/archives/2012/12/how_many_bad_lo.html

It would have been impossible to either buy or sell any real estate in the United States.  Fannie and Freddie are so important to the real estate market that if they weren't there, no one would dare loan any money for a mortgage. The other thing is that if Fannie/Freddie defaulted, then it would have been really bad for China, Russia, and Saudi Arabia in addition to practically every insurance company, pension fund, or fixed income mutual fund.  I'm not sure what would have happened, but it couldn't have been good.

You would start with the idea that Fannie and Freddie are normal businesses that are going through a bankruptcy procedure. Their assets gets sold and their creditors have to take a haircut. Because these companies were so large and intertwined with government, many people would be upset because the market changes caused  by the bankruptcy would shuffle all of the players in the mortgage business. Also, should Fannie and Freddie disappear into smaller investment companies, the role of the Federal government in  influencing housing would be greatly diminished and real market forces would take over. That unpredictability of the real market frightens politicians.

The receivership of the , and , stomped on their . They didn't get bailed out. The thing to understand is: the total U.S. mortgage loan market is ~$10 trillion dollars, and the GSEs guarantee/own half of it. If they'd been allowed to go , it would have been very, very nasty for the . Who do you suppose bought all those ? , , etc. Massive losses everywhere. However, take heart: http://www.reuters.com/article/2013/03/20/us-usa-housing-fanniemae-idUSBRE92J04Q20130320 (from ) And now: http://online.wsj.com/article/SB10001424127887323368704578595582454397520.html (from ) Other fun part? Well, it's nice that the U.S. housing market is showing signs of recovery (So the indicates: http://www.bloomberg.com/news/2013-02-26/home-prices-in-20-u-s-cities-increase-by-most-since-2006.html), but from that same article above: Fannie Mae, Freddie Mac and the finance nine out of every ten new home loans. [emphasis mine] Thank Uncle for your cheap refi! See also

The other written answers seem to imply that the assets of Fannie Mae and Freddie Mac would have completely evaporated if the government had not stepped in.  I assert that not every loan they owned was bad.  They did have good loans.  My home loan for instance, which I am still paying on, and glad to do so. In my opinion the nation would have been better off in the long run if Fannie Mae and Freddie Mac  had been forced into a controlled bankruptcy.  This would have put a stop to the moral hazard problem that we will eventually have to pay for. The same thing should have happened to Chrysler, GM and any bank that could not meet its obligations. The bail out created a situation in which the corrupt millionaires who ran Fannie Mae and Freddie Mac were proven wise to make such foolish loans.  That is the lesson of the bail out, make money while you can with risky loans and when the bad times come you won't have to suffer because Uncle Sam will make you whole.  Its perfect capitalism.  All reward and no risk.  I'm sorry, of course there is risk, its just that the people who made the bad loans won't have to bear it and won't have to suffer. And if you think the bankers learned their lesson your right, just not the lesson we needed them to learn.

If they were not put into receivership the Wall Street banks where all of the problems really were would have had to absorb the losses.  Instead, by taking over Fannie and Freddie the Federal Government had an off budget means to essentially rewrite off all of the bad debt the Investment banks made and finance it with money printing at the Fed. Unlike explicit bailouts, like that of of the auto industry, the way Fannie and Freddie were set up legislatively was quite clever to allow exactly this to happen.  Contrary to other responses, Fannie and Freddie were not government agencies nor were there securities guaranteed by the Federal government. This was explicitly stated on all of their offerings.  There was a view of an implied backing by virtue of a small line of credit each had to the Federal Reserve (different, but akin to what most banks have).  After all of the bailouts that were occurring, would the American public have gone for bailing out Wall Street?  Not a chance. Do it indirectly and not have Congress have to take responsibility for even more of a bailout than the $1Trillion they did already.  A brilliant hoodwinking of the American public.