Overview of Recent Administrative Reforms of Fannie Mae and Freddie Mac [July 25, 2019] [open pdf - 1MB]
From the Introduction: "Congress chartered Fannie Mae and Freddie Mac, also known collectively as the government-sponsored enterprises (GSEs), to promote homeownership by providing liquidity to the secondary markets for single-family residential mortgages and multifamily (apartment and condominium) construction. Guaranteeing single-family residential mortgages is their core business activity, but it comes with risks. The GSEs retain the credit (default) risks from the mortgages they purchase from loan originators and subsequently issue mortgage-backed securities (MBSs), which are bond-like securities. Investors who purchase the MBSs are guaranteed to get their initial principal investment returned, but they assume the risk that borrowers may choose to repay their mortgages ahead of schedule, known as prepayment risk. The MBSs are considered more liquid (in comparison to the original mortgages with both attached risks) because they may be traded or sold for cash more quickly. If investors are willing to hold MBSs, then more private-sector funds become available for relatively less liquid mortgages--particularly 30-year fixed-rate mortgages. National mortgage rates tend to fall as the supply of funds in this market increases, making homeownership more affordable."
CRS Report for Congress, R45828
Congressional Research Service: https://crsreports.congress.gov/