The Essential Role of Fannie Mae and Freddie Mac in the U.S. Mortgage Market

The American dream of homeownership is, for millions, facilitated by a complex financial system where two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, play a foundational and often misunderstood role. Their function is not to originate mortgages directly with consumers but to operate in the secondary mortgage market, performing a critical intermediary function that ensures liquidity, stability, and affordability for the vast majority of conventional home loans. Understanding their role is key to comprehending how the U.S. housing finance system functions.

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) were created by Congress with a public mission: to provide liquidity, stability, and affordability to the mortgage market. They fulfill this mission by purchasing mortgages from the lenders that originate them, such as banks, credit unions, and mortgage companies. This process is vital. When a lender makes a 30-year fixed-rate loan, it ties up its capital for decades. By selling that loan to Fannie or Freddie, the lender receives immediate cash, which it can then use to originate more loans for new homebuyers. This constant flow of capital is the “liquidity” they provide, ensuring that mortgage money is consistently available to qualified borrowers across the country, in all economic cycles.

However, Fannie and Freddie do not simply hold these purchased mortgages. They bundle large groups of them into what are called mortgage-backed securities (MBS), which are then sold to investors worldwide—from pension funds to foreign governments. In this process, the GSEs guarantee the timely payment of principal and interest on these securities, even if a homeowner defaults. This guarantee is the cornerstone of their role, as it makes the MBS exceptionally safe and attractive to investors, thereby drawing massive amounts of global capital into the U.S. housing market. This influx of investment capital further reduces the cost of borrowing for homebuyers.

To manage the risk associated with their guarantee, Fannie and Freddie establish strict underwriting guidelines known as “conforming loan” standards. These standards dictate the maximum loan amount—which adjusts annually—as well as requirements for credit scores, debt-to-income ratios, and loan-to-value ratios. Loans that meet these criteria are termed “conforming loans.“ By setting these uniform rules, the GSEs promote responsible lending practices and create a standardized, efficient national market. The most visible impact for borrowers is that conforming loans typically carry lower interest rates than non-conforming or “jumbo” loans, directly enhancing affordability.

The 2008 financial crisis starkly revealed the systemic risk embedded in this model. As housing prices collapsed and defaults soared, Fannie and Freddie faced catastrophic losses, threatening the entire financial system. The federal government placed them into conservatorship under the Federal Housing Finance Agency (FHFA), injecting massive taxpayer funds to stabilize them. This event permanently altered their role, highlighting their implicit government backing and leading to an ongoing, heated debate about their future structure.

Today, while still in conservatorship, Fannie Mae and Freddie Mac continue to perform their core functions more cautiously under heightened regulatory scrutiny. They remain the central pillars of the housing market, supporting the 30-year fixed-rate mortgage—a product rare in other countries—and ensuring market liquidity. Their role, therefore, is that of a vital public-private hybrid: they are profit-oriented entities with a congressional mandate to support housing, operating as a de facto utility for the mortgage industry. They are the invisible engine in the background, making the widespread availability of affordable, long-term mortgage credit possible, and in doing so, they underpin both the American housing market and, by extension, a significant portion of the national economy. Their enduring presence, albeit in a reformed state, underscores their indispensable function in turning the aspiration of homeownership into a tangible reality for generations of Americans.