By: Arye Abraham
Fannie Mae and Freddie Mac are an integral part of the secondary mortgage market in the U.S. for a plethora of reasons. They provide the essentials for the secondary mortgage market– liquidity, dependability, and affordability. Fannie Mae and Freddie Mac guarantee prompt payment of principal and interest on mortgages, thereby stimulating the mortgage market and ensuring security of investment within it.
The U.S. government formed Fannie Mae and Freddie Mac to create a dependable and trustworthy program that supplies mortgage funds for the entire nation. Fannie Mae and Freddie Mac are particularly reliable because they offer instant access to funds for many banks and mortgage companies who make loans for financing the purchase of a home. If not for Fannie Mae and Freddie Mac, banks and mortgage companies would be more wary of making these loans because of the uncertainty of being able to sell off the loans to individual investors or institutional companies. Additionally, if not for Fannie and Freddie packaging these mortgages into mortgage backed securities, investors would also be more cautious of investing into the secondary mortgage market, too. After the strong housing market crashed in 2008, Fannie and Freddie were on the verge of collapsing due to the decreasing home prices. As home prices rise, there is lower risk of default, and vice versa. Fannie and Freddie act as the intermediary between the borrower and lender, to abridge the course of action and make it easier for the borrower to borrow and lender to lend. Until the U.S. finds a more efficient liaison and an enhanced method of securitizing mortgages for investors, Fannie and Freddie will always be here. I don’t think we will ever get rid of Fannie Mae and Freddie Mac because they provide a great deal of liquidity to banks and mortgage companies, while also making it easier for one to obtain a loan and keep interest rates low. Being a federally sponsored company, Fannie and Freddie are assured to be bailed out by the government if anything goes wrong. With the housing market coming back in full force, I don’t foresee their collapse arriving any time soon.