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Fannie and Freddie

The two largest mortgage companies in the country are Fannie Mae and Freddie Mac, created by the government to make home ownership affordable and available to a wider sector of Americans. Combined, the two publicly-traded companies hold nearly $4 trillion worth of home mortgages, or about three fourths of the country’s single family home mortgages.

These two companies do not make loans directly; rather, they buy loans from banks and other types of lenders, guarantee repayment, and then issue securities that are backed by those loans. Those securities can be bought and sold freely as a highly liquid investment vehicle. By purchasing mortgage loans from mortgage originators, Fannie Mae and Freddie Mac facilitate expansion of homeownership, by lessening the risk to mortgage originators, and making it possible for these originators to make more loans.

The two companies are private firms, although they were chartered by the government to achieve social goals that include making homeownership more affordable to moderate income families, and to enable low-income and minority borrowers to buy homes as well. Traded on the new York Stock Exchange, these firms do not receive public money, and have created substantial shareholder value for its investors. Although they are private, because they are mandated to promote these social goals, they enjoy benefits other mortgage companies do not have, such as the ability to borrow money directly from the Treasury.

Fannie Mae became a private company in 1968, and Freddie Mac was created soon afterwards by an Act of congress in 1970, to expand the secondary mortgage market, stabilize the mortgage industry and increase homeownership in America. Since their inception, homeownership has increased dramatically, and mortgage interest rates have been more affordable to more people.

HUD has proposed targets that increase Fannie and Freddie’s goals for providing low-income and minority loans by 5-10 percent a year, between 2005 and 2008.