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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