Revisiting the Net Benefits of Freddie Mac and Fannie Mae
The U.S. mortgage market provides benefits to American families that are not generally available in other countries today and were only partially available 30 years ago. Homebuyers can now borrow at rates just slightly above yields on Treasury securities of similar duration, and mortgage money is almost always available even when credit for other purposes is difficult to obtain.
This combination of choice and performance is made possible by an array of specialized government and private institutions, including many firms that combine private ownership with government support and supervision. These firms include commercial banks and savings associa- tions, as well as Freddie Mac and Fannie Mae, two government-sponsored enterprises (GSEs).
Prospective borrowers are also offered a wide range of mortgage options to fit their particular situations. Among the choices are the term of the loan, whether the interest rate will float or remain fixed, how much of the home purchase is financed, and when and if to lock in the interest rate. First-time and low-income homebuyers find educational and financial support available. Homeowners may choose to refinance on occasions that are to their own advantage.
Freddie Mac and Fannie Mae have become key mortgage market participants, and their contributions have been recognized by promi- nent scholars in economics and finance. Richard Roll, founder of the mortgage securities research group at Goldman Sachs, has observed that, “Federal policy toward Freddie Mac and Fannie Mae is accomplishing its intended purpose: it makes housing more affordable to a broad range of Americans.”4
Today’s Mortgage Markets
These options are not limited to only a fortunate few. The U.S. ranks high among major nations in the ratio of mortgage debt outstanding to GDP,2 and the volume of transactions is remarkable. In 2003, over $4 trillion of mortgages were orig- inated, with about three-quarters of that amount being refinance loans.3 In a recent article Richard Green and Susan Wachter compared the U.S. market with mortgage markets in other countries, concluding that “... the unique characteristics of the U.S. mortgage market provide substantial benefits for American homeowners and the overall stability of the economy” (2005).
Mortgage Market Participants
The residential mortgage industry consists of primary and secondary mortgage markets that link homebuyers and investors. Lenders “originate” mortgages for borrowers in the primary market, often with the help of mortgage brokers. In the secondary market, lenders and investors buy and sell mortgages in the form of whole loans or mortgage-backed securities (MBS). Other participants include “conduits,” which assemble mortgages into pools that can be used as collateral for MBS, loan servicers, and mortgage
Today’s Mortgage Markets
Green and Wachter (2005), Table 2.
Greenspan and Kennedy (2005), Table 1.
Roll (2003), 32.