Federal Housing Finance Agency: Meaning, History, FAQs

What Is the Federal Housing Finance Agency (FHFA)?

The Federal Housing Finance Agency (FHFA) is U.S. regulatory agency that oversees the secondary mortgage market and players within it. Established in 2008, the FHFA’s responsibilities include supervising Fannie Mae and Freddie Mac, as well as the 11 banks that comprise the Federal Home Loan Bank (FHLB) System and the Office of Finance (OF), a joint office of the FHLBanks.

What Does the Federal Housing Finance Agency Do?

The Federal Housing Finance Agency operates as an independent agency. It is a member of the Financial Stability Oversight Council (FSOC), which seeks to pinpoint and troubleshoot any risks to the United States’ financial systems. FHFA does not receive any money from Congress but instead is funded by the entities it regulates.

The FHFA's mission is to ensure the entities it regulates operate in a safe and sound manner and to maintain a competitive, liquid, efficient, and resilient housing finance market throughout the economic cycle. It has the ability to put government-sponsored enterprises (GSEs) into receivership or conservatorship—in effect, supervise and rehabilitate them if they're in trouble.

The FHFA has identified three goals to plan for the future:

1. It will maintain credit availability and prevent foreclosure for all mortgages.
2. It will lower the risk to taxpayers by elevating the part private capital plays within the mortgage market. 
3. It will create a new securitization infrastructure for single-family homes through Fannie Mae and Freddie Mac, which can be modified in the future for use in the secondary market.

Federal Housing Finance Agency and Secondary Markets

The secondary mortgage market trades existing mortgages and mortgage-backed securities (MBSs). Together with Fannie Mae and Freddie Mac, the Federal Home Loan Bank (FHLB) system offers nearly $7.2 trillion to fund U.S. financial institutions and mortgage markets. FHLB members include thrift institutions, credit unions, insurance companies, commercial banks, and other financial institutions.

In addition to lower-cost mortgages, the FHLB system also offers its members asset-liability management and liquidity for members’ interim needs, as well as funding for projects involving community development. The FHLB system is a critical part of the U.S. financial system; around 80% of U.S. lenders depend on FHLBanks. The FHFA is part of the Financial Stability Oversight Council (FSOC), which seeks to pinpoint and troubleshoot any risks to the United States’ financial security.

History of the Federal Housing Finance Agency

The FHFA was established under the Federal Housing Finance Regulatory Reform Act, a sub-act of the Housing and Economic Recovery Act (HERA) signed into law on July 30, 2008. It was created to help strengthen the U.S. housing-finance system after the fallout from the subprime mortgage meltdown of 2007, which sparked a worldwide financial crisis and eventually the Great Recession.

The FHFA replaced two entities: the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Board, the original overseer of the FHLB system (it was created by the Federal Home Loan Bank Act of 1932). The FHFA took over the legal and regulatory authority of these agencies, which ceased existence one year after HERA was passed.

The Housing and Economic Recovery Act's underlying aim was to restore public faith in the government-sponsored enterprises (GSEs) that backed and purchased home loans—namely,  Fannie Mae and Freddie Mac—and the FHFA was to play a key role in that. It was endowed with "far greater authorities than its predecessors," as its director James Lockhart stated. And in fact, it quickly exercised that authority to take charge of the two troubled GSEs.

Federal Takeover of Fannie Mae and Freddie Mac

As a new agency, the FHFA quickly swung into action: It used its powers to put Fannie Mae and Freddie Mac under conservatorship on Sept 6, 2008.

The two GSEs, which buy and guarantee mortgages issued through banks and other lenders, had been badly hit by the subprime mortgage meltdown. In 2007, they began to experience large losses on their portfolios of loans; by 2008, they were billions of dollars in debt. Because Fannie and Freddie are by far the largest mortgage market-makers in the U.S.—they have, in effect, a government-sponsored monopoly in much of the nation's secondary mortgage market—their problems caused panic throughout the banking and investment worlds, fueling the financial crisis.

So, in the autumn of 2008, the FHFA stepped in. It arranged for the U.S. Treasury to give the two $190 million in bailout money. But it also revamped their boards of directors and began implementing plans to reduce their losses and operational and credit risk.

Fannie and Freddie slowly returned to solvency. They paid back the $190 million. In September 2019, the Treasury and FHFA announced that Fannie Mae and Freddie Mac could start keeping their earnings to shore up capital reserves of $25 billion and $20 billion, respectively.

In October 2019, FHFA released a new Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. The three broad objectives of the Strategic Plan are to ensure that the enterprises:

1. Focus on their core mission responsibilities to foster competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets that support sustainable homeownership and affordable rental housing;
2. Operate in a safe and sound manner appropriate for entities in conservatorship; and
3. Prepare for their eventual exits from the conservatorships.

These objectives were renewed in 2020 and 2021.

The Bottom Line

The Federal Housing Finance Agency (FHFA) is a U.S. regulatory agency that oversees the secondary mortgage market. Created by the Housing and Economic Recovery Act, the FHFA served to restore confidence in and stability to the mortgage market in the wake of the 2008 financial crisis. Its policies are designed to prevent a repeat of the housing collapse and promote stability so that Americans can buy homes with confidence. While the typical homebuyer may not give much thought to what this agency does, it's important to understand what role it plays in regulating mortgage financing in the U.S.