As additional incentive, the GSEs guarantee that interest and principal on the loans will be repaid. This is so they can assure buyers of the mortgage-backed securities that the securities are sound and safe. Fannie and Freddie set standards for the loans they will buy.
And, likewise, mortgage lenders would have a hard time coming up with money to make loans.īecause of their dominance, it’s important for mortgage bankers to ensure that many of the loans they make can be sold to the GSEs. Without Fannie and Freddie, it would likely be more difficult to get a home mortgage. In 2019, Fannie and Freddie acquired 52% of all mortgages in the U.S., dominating the market between them. The GSEs make money by keeping some of the loans and collecting interest, but most are repackaged and sold to investors, who then collect the interest borrowers pay. They do this by purchasing loans from lenders, replenishing the lenders’ cash so they can extend more financing. Instead, they make it possible for private financial institutes, including banks, to make loans. The GSEs don’t actually make loans to homebuyers. The CARES Act, formally called the Coronavirus Aid, Relief and Economic Security Act, called on the GSEs to provide homeowners with as much as 18 months of forbearance. More recently, the two played a role in helping borrowers impacted by the Covid pandemic. Armed with Washington’s deep pockets, the GSEs purchased nearly all the mortgages sold after the collapse and helped prevent an even worse debacle. After experiencing huge losses on defaulting mortgages, they were bailed out and taken over by the federal government. By encouraging financial institutions to lend freely, largely because of heavy political pressure, they contributed to the unsustainable rise in housing prices that fueled the boom and subsequent bust. In 1989 Freddie Mac also became privately owned.īoth GSEs played roles in the housing crisis that began in late 2007. The two are often referred to as GSEs, short for “government-sponsored enterprise.” Freddie Mac’s purpose was to expand the secondary mortgage market and particularly to provide competition to Fannie Mae, which had come to dominate the market and had become a private shareholder-owned company a couple of years earlier. Fannie Mae innovated the 30-year fixed-rate mortgage that is still the standard today.įreddie Mac came along later, in 1970, as the Federal Home Loan Mortgage Corporation (FMCC) that was, like Fannie Mae, entirely owned by the government. The mortgages were combined and repackaged as mortgage-backed securities for sale to investors. Its purpose was to provide lenders with funding to make home loans by buying the lender’s mortgages. Fannie Mae was created in 1938 as the Federal National Mortgage Association (FNMA), a financial organization that was owned by the government.
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