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🗽us history – 1865 to present review

Fannie Mae and Freddie Mac

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that play a crucial role in the U.S. housing finance system by providing liquidity, stability, and affordability to the mortgage market. They buy mortgages from lenders, package them into mortgage-backed securities, and sell these securities to investors, which helps to ensure that banks have enough capital to issue new loans. Their operations became particularly significant during the Great Recession as they were placed under conservatorship due to severe financial distress.

5 Must Know Facts For Your Next Test

  1. Fannie Mae was established in 1938 as part of the New Deal to expand the mortgage market and increase homeownership, while Freddie Mac was created in 1970 to provide competition and further enhance liquidity in the housing finance system.
  2. Both Fannie Mae and Freddie Mac were heavily involved in buying subprime mortgages before the financial crisis, which contributed to their financial instability when housing prices fell.
  3. In 2008, amid the Great Recession, both entities were placed under conservatorship by the Federal Housing Finance Agency (FHFA), marking one of the largest government interventions in the housing market.
  4. The government bailout of Fannie Mae and Freddie Mac involved substantial financial support, totaling over $190 billion, as they faced massive losses from mortgage defaults.
  5. Their ongoing existence and operations have raised debates about government involvement in housing finance and potential reforms needed to prevent future crises.

Review Questions

  • How did Fannie Mae and Freddie Mac contribute to the stability of the U.S. housing market before the Great Recession?
    • Fannie Mae and Freddie Mac played a vital role in stabilizing the U.S. housing market by providing liquidity through purchasing mortgages from lenders. This allowed banks to have more capital available for issuing new loans, fostering increased homeownership rates. Their ability to package these loans into mortgage-backed securities attracted investment, ensuring that funds flowed into the housing market, which helped maintain affordability and accessibility for many Americans.
  • What were the consequences of placing Fannie Mae and Freddie Mac under conservatorship during the financial crisis?
    • The conservatorship of Fannie Mae and Freddie Mac had significant consequences for both the housing market and government policy. It prevented their total collapse, stabilizing the mortgage market during a critical time. However, it also led to an extensive government intervention that resulted in substantial taxpayer liabilities. This situation sparked discussions around necessary reforms for GSEs and raised concerns about their impact on both future economic stability and government spending.
  • Evaluate the role of Fannie Mae and Freddie Mac in contributing to both the development of the housing finance system and its vulnerabilities leading up to the Great Recession.
    • Fannie Mae and Freddie Mac significantly shaped the U.S. housing finance system by increasing access to mortgages through their purchasing activities, which encouraged higher homeownership rates. However, their aggressive investment in subprime mortgages created vulnerabilities within this system. When housing prices dropped during the Great Recession, both GSEs faced enormous losses due to rising defaults on these risky loans. This duality highlights how entities designed to enhance market stability can also contribute to systemic risks when not properly regulated.