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Jan 12, 2012

How Fannie Mae and Freddie Mac Work

This chart shows how Fannie Mae work and how it put more liquidity into the housing market. It does that by taking mortgage loans from banks in exchange for cash. That way banks can give out more mortgages. A big factor in this process was the fact that Fannie and Freddie were charged a lower interest rate than private institutions when borrowing money from the debt markets. In other words, these two government sponsored entities were perceived as having a lower risk.


Especially since the eighties with the mortgage-backed securities getting more and more popular this process gained momentum. In the next graph you can see the holdings of mortgage debt outstanding by type of institution. In the eighties and nineties holdings of mortgage debt by Fannie and Freddy (Agency- and governmentsponsored enterprises) exploded.

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