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Revisiting the Net Benefits of Freddie Mac and Fannie Mae

The coexistence of federally insured deposito- ries and federally chartered GSEs produces a unique combination of options for homebuyers. In comparing mortgage markets in major developed countries, Green and Wachter (2005) find that in countries with well-developed financial markets, depositories are prominent investors, as they are in the U.S. They also find, however, that few countries outside the U.S. offer homeowners the same access to long-term, fixed-rate mortgages with no prepayment penalty. In countries with limited securitization, loans are short-term or carry adjustable rates. In countries with well-developed securitization, fixed-rate mortgages are more common but concern for depository risk has led to limits on prepayment opportunities.

the President to extend the same secondary market facility to holders of conventional mort- gages. In 1968 Congress chartered Ginnie Mae as a government-owned corporation within HUD mandated to guarantee payments on MBS rep- resenting pools of federally insured or guaranteed mortgages. Freddie Mac was established in 1970 to purchase conventional mortgages, and Fannie Mae was authorized to do the same.12

Today, Freddie Mac and Fannie Mae operate under essentially identical charters. They are directed to:


provide stability in the secondary market for residential mortgages


respond appropriately to the private capital market

The Role of Freddie Mac and Fannie Mae

The federal government has long been involved in the secondary residential mortgage market. Congress first authorized the creation of national mortgage associations in 1934. Fannie Mae was created in 1938 to provide a dedicated second- ary market outlet for FHA-insured mortgages. Its authority was expanded thereafter to include VA-guaranteed residential mortgages. By tap- ping new sources of funds in the domestic


provide ongoing assistance to the second- ary market for residential mortgages (including mortgages financing homes for low- and mod- erate-income families) by increasing the liquid- ity and improving the distribution of mortgage investment, and


promote access to mortgage credit throughout the nation.13

Freddie Mac and Fannie Mae are major players

capital markets through debt issuance, Fannie Mae channeled a steady stream of funds into the financing of FHA and VA loans and provided a flexible supply of credit. However, this dedicated capital market access was absent for conven- tional loans. Interest rate volatility and geographi- cal imbalances in the 1960s led Congress and

in the secondary mortgage market. They are not, however, allowed to originate loans. Recently Greenspan and Kennedy (2005) estimated that the combined share of Freddie Mac and Fannie Mae purchases of mortgage originations to the total conventional market was approximately 36 percent.14 As of the end of 2005, the two GSEs


See Frame and White (2004, 3-4) for further historical perspective.


12 U.S.C. Sec. 1451 Note and 1716.


Total Conventional Originations can be calculated from Table 1 of Greenspan and Kennedy (2005) by subtracting FHA and VA originations from Total Market Originations.



Today’s Mortgage Markets

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