Ron J. Feldman - Senior Financial Specialist
Published December 1, 1996 | December 1996 issue
Fannie Mae and Freddie Mac are the two largest government-sponsored enterprises (GSEs) and suppliers of funds to the one- to four-family housing market in America. A GSE is a privately owned, federally chartered corporation that operates nationally with specialized lending powers. The Congress creates GSEs to correct perceived failures in private credit markets. To assist GSEs in achieving their goals, Congress provides them with explicit subsidies. Fannie Mae and Freddie Mac, for example, do not pay state and local income tax on their earnings. More important are the implicit subsidies that GSEs receive. Although the federal government has disavowed any legal responsibility for their financial obligations, markets behave as if the federal government would almost surely make good on GSEs' obligations if the GSE could not. This saves the GSEs money by allowing them to borrow at an interest rate that is only slightly above the rate available to the U.S. Treasury.
Fannie and Freddie provide funds to the housing market by borrowing money on national capital markets and using the funds to purchase mortgages on the secondary market. Fannie and Freddie cannot finance mortgages above the conforming limit ($214,600 in 1997 for one- to four-family mortgages) or mortgages that do not meet certain credit standards. Nonetheless, the scale of Fannie and Freddie's operations are substantial; they had financed about 36 percent of all one- to four-family housing debt outstanding as of June 1996-more than the entire commercial banking system.