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March 28, 2008 8:27 pm

Freddie Mac and Fannie Mae

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In March 2008 the US government announced measures to help the ‘government-sponsored entities’ - Fannie Mae, Freddie Mac, and the FHLB - boost ailing mortgage markets.

Although the GSEs are not legally part of the government sector, the government can make use of their special attributes to support mortgage markets without resorting to direct intervention.

How do the GSEs operate in normal markets, how have they changed in response to recent market troubles, and what is the role of government policy? Follow the three steps on our interactive guide for an overview.

(Scroll down for definitions of key terms)

GSE - Government-sponsored enterprises
Collectively describes Fannie Mae, Freddie Mac, and the FHLB

MBS - Mortgage-backed securities:
A type of asset-backed security that uses a single mortgage, or a pool of them, as collateral. Investors receive payments derived from the interest and principal of the underlying mortgages.

FHLB - Federal Home Loan Banks
A network of bank co-operatives founded in the Great Depression. Although not legally part of the public sector, the market believes their debt is implicitly guaranteed by the government, allowing them to borrow cheaply.

Regulated by the Federal Housing Finance Board, they have been given permission to double investments in mortgage-backed securities for two years – providing a means for the US government to support the MBS market and, by turn, the home loan market, without resorting to direct intervention.

Fannie Mae and Freddie Mac
Although these government-chartered mortgage financiers, they have roots in government policy.

Fannie Mae was created in the Great Depression as a government agency to create a secondary market for mortgages. The aim was to boost banks’ capacity to offer home loans, by buying up their existing home loans in exchange for cash.

In 1968 Fannie Mae was partially privatised and Freddie Mac was created, as a wholly private company, to provide competition in this secondary mortgage market.

Both Fannie Mae and Freddie Mac began turn these purchased mortgages into tradable securities, known as mortgage-backed securities. They also purchase some of the MBS they create.

Fannie, like Freddie, is now a listed corporation. Both companies have their own regulator, the Office of Federal Housing Oversight, and are subject to specific regulations. Like the FHLBs, they are perceived by the wider market as having implicit government backing. In March 2008 Ofheo gave both companies permission to add as much as $200bn into the beleagured mortgage markets, by reducing their capital requirements.

Text: Krishna Guha, Gillian Tett, Joanna Chung, Saskia Scholtes and Kate Mackenzie
Interactive design: Steve Bernard

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