Understanding Fannie Mae and Freddie Mac: Government Control and the Secondary Mortgage Market

Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) that have played an essential role in making homeownership accessible to Americans. Established with a mission to provide liquidity, stability, and affordability to the housing finance system, Fannie Mae and Freddie Mac purchase mortgages from lenders, bundle them into securities and sell them to investors on the secondary market. Fannie Mae was founded in 1938, and Freddie Mac was established in 1970 as a direct competitor to Fannie Mae, with a similar function - to purchase mortgages from lenders and bundle them into securities sold on the secondary market. Despite their critical role in the US housing market, these GSEs faced criticism for their lending practices that allegedly contributed to the 2008 financial crisis.
As a result, the US government placed both Fannie Mae and Freddie Mac under conservatorship to prevent them on the brink of failure. Subsequently, these entities remain under government control, and they continue to play a significant role in the US housing finance system. In the finance and housing sectors, the government controls the level of influence and oversight it has over a particular market or industry by enacting policies and regulations that dictate certain aspects; including lending practices, interest rates, and consumer protection, among other things. This control is critical to protect investors and consumers from fraudulent practices. The secondary market is an intermediary market where the assets already issued in the primary market are bought and sold by investors. In the housing industry, it includes entities like Fannie Mae and Freddie Mac that purchase home loans from lenders, bundle them together, and sell them as mortgage-backed securities to investors. This ultimately helps provide liquidity to the mortgage market, which in turn fuels the housing market.
Primarily, Fannie Mae and Freddie Mac deal with conventional loans - those that are not backed by a government agency such as the FHA or VA. Though they don't purchase or securitize FHA or VA loans, they do have involvement in the secondary market for these types of mortgages, and their focus remains on conventional loans. The government continues to play a significant role in the mortgage-backed securities market today. Government-sponsored enterprises like Fannie Mae and Freddie Mac purchase and securitize mortgages from banks and financial institutions. Also, the government through the Federal Reserve, may purchase mortgage-backed securities in large quantities as part of its monetary policy to stimulate the economy. Finally, the government enacts policies and regulations to oversee the mortgage-backed securities market, protecting investors and consumers from risky or fraudulent practices.
If you're considering a conventional loan in Arizona, bear in mind that meeting the lender's requirements for a credit score, income, employment history, and debt-to-income ratio is critical. Lenders will also consider factors like the down payment amount and the property's value and condition when assessing your eligibility for a conventional loan. Specific requirements may vary between lenders, making it best to compare options and find the best fit for your financial situation. The complexities of finding a home can be overwhelming, don't let that hold you back! As part of the Rizzi Group at Platinum Living Realty, I am ready to connect you with lenders who can work with you individually to present a variety of options. I would be happy to assist you in the process of finding the best fit for your financial situation. Hit the contact button and let's chat today!