What, or who, are Freddie Mac and Fannie Mae?
Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) are government-sponsored entities that were created to provide more liquidity in the housing market by purchasing and guaranteeing mortgages.
Fannie Mae was created in 1938 as part of the New Deal, and Freddie Mac was created in 1970 to provide competition in the secondary mortgage market. Both organizations operate in a similar manner, purchasing mortgages from lenders and either holding them in their own portfolios or packaging them into securities that are sold to investors. This helps to provide a steady supply of funds for mortgage lending and makes it easier for banks and other lenders to offer mortgages to homebuyers.
In addition to providing liquidity to the housing market, Fannie Mae and Freddie Mac also provide a degree of stability and standardization to the mortgage industry. They set underwriting standards and guidelines for the mortgages they purchase, which helps to ensure that the mortgages are of a certain quality and reduces the risk of default.
Fannie Mae and Freddie Mac are not government agencies, but they are overseen by a government agency called the Federal Housing Finance Agency (FHFA). In 2008, during the financial crisis, Fannie Mae and Freddie Mac were placed into conservatorship by the federal government in order to stabilize the housing market and protect taxpayers from losses. They remain under conservatorship to this day.
The Current Role of Fannie Mae and Freddie Mac
Today, the primary role of Fannie Mae and Freddie Mac is to provide liquidity and stability to the US housing market by purchasing and guaranteeing mortgages. They do this by:
- Purchasing and securitizing mortgages: Fannie Mae and Freddie Mac purchase mortgages from lenders, which they then package into securities and sell to investors. This provides lenders with more funds to lend to homebuyers, and investors with a way to invest in the housing market.
- Setting underwriting standards: Fannie Mae and Freddie Mac set underwriting standards and guidelines for the mortgages they purchase. This helps to ensure that the mortgages are of a certain quality and reduces the risk of default.
- Providing mortgage insurance: Fannie Mae and Freddie Mac also provide mortgage insurance to lenders, which protects them in the event of default. This helps to make it easier and more affordable for borrowers to obtain mortgages.
- Supporting affordable housing: Fannie Mae and Freddie Mac also have mandates to support affordable housing. They do this by purchasing and securitizing mortgages for low- and moderate-income borrowers, and by providing funding for affordable housing initiatives.
Since the financial crisis, Fannie Mae and Freddie Mac have remained under conservatorship by the federal government. There have been ongoing discussions about what the future of Fannie Mae and Freddie Mac should look like, with some advocating for their privatization and others arguing that they should remain under government control. However, as of now, Fannie Mae and Freddie Mac continue to play a significant role in the US housing market.
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