The gses from the treasury it established the right

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the GSEs from the Treasury; it established the right for the Treasury to purchase equity in the
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67 GSEs; and introduced a consultative role for the Federal Reserve in a reformed GSE regulatory system. On the same day, the Federal Reserve announced that the Federal Reserve Bank of New York would have the right to lend to the GSEs as necessary. The Housing and Economic Recovery Act of 2008, signed into law on July 30, 2008, expanded regulatory authority over Fannie Mae and Freddie Mac by the newly established Federal Housing Financing Agency. It also gave the U.S. Treasury the authority to advance funds for the purpose of stabilizing Fannie Mae or Freddie Mac, limited only by the amount of debt that the entire federal government is permitted by law to commit to. The law raised the Treasury's debt ceiling by $800 billion, in anticipation of the potential need for the Treasury to have the flexibility to support Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. In the judgment of the Congressional Budget Office (CBO), the conservatorship and the large ownership stake of the U.S. Treasury made Fannie Mae and Freddie Mac part of the government. The implication is that their operations should be reflected in the federal budget. We return to this issue in the next chapter. 32 As late as August 2008, Freddie and Fannie claimed that they were solvent with regulatory capital of $37 and $47 billion, respectively. However, these numbers excluded “temporary” paper losses of $34 billion at Freddie and $11 billion at Fannie. These were booked as tax-deferred assets, having the perverse effect of inflating the assets instead of reducing them. What’s more, the GSEs did not adequately write down values of guarantees that had deteriorated in quality due to downgrades of the private mortgage insurers that were providing them. But the facts on the ground spelled trouble. Freddie and Fannie saw exponential growth in mortgage delinquencies on their retained portfolios, as well as in their guarantee books. At Fannie Mae, delinquency rates on mortgages rose from an all-time low of 0.45% in 2000 to 0.98% in 2007, before jumping to 2.42% in 2008. Delinquencies at Freddie were only slightly lower: from an all-time low of 0.39% in 1999 to 0.65% in 2007, before tripling to 1.72% in 2008. More than half of the delinquencies were concentrated in four states: California, Arizona, Nevada, and Florida. As a result, the losses at Fannie grew from $2.2 billion in each of the first and second quarters of 2008 to $29.0 billion in the third quarter of 2008. Similarly, the losses at Freddie were only $1 billion in the first half of 2008, but ballooned to $25.3 billion in the third quarter of 2008. It was ultimately these exploding losses and the GSEs’ inability to raise private capital
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68 that prompted the Treasury to put the GSEs into the FHFA’s conservatorship on September 7, 2008. Their combined 2008 losses would come in at $109 billion.
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