Fannie Mae and Freddie Mac: Cornerstones of the U.S. Housing Finance System
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are pivotal entities in the American housing finance system. Created by Congress, these government-sponsored enterprises (GSEs) ensure liquidity, stability, and affordability in the mortgage market. Let’s delve into their roles, functions, and impact on housing finance.
Key Functions of Fannie Mae and Freddie Mac
- Providing Liquidity to Mortgage Markets
Fannie Mae and Freddie Mac purchase mortgages from banks, Savings institutions, and mortgage companies. By doing so, they provide these lenders with cash, which can then be used to issue new loans. This cycle ensures that lenders have the resources to meet the ongoing demand for home loans.
- Packaging Mortgages into Mortgage-Backed Securities (MBS)
The GSEs package the purchased mortgages into mortgage-backed securities (MBS), which are sold to investors. By guaranteeing the principal payment and interest on these securities, Fannie Mae and Freddie Mac attract investors who might not traditionally invest in mortgages. This process:
- Expands the pool of funds available for housing.
- Makes the secondary mortgage market more liquid.
- Lowers interest rates for borrowers.
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