SEATTLE AVENUE

HUD, the U.S. Department of Housing and Urban Development, regulates two housing government-sponsored enterprises, Fannie Mae and Freddie Mac (the GSEs), which were chartered by Congress to create a secondary market for residential mortgage loans. They are considered “government-sponsored” because Congress authorized their creation and established their public purposes.

Fannie Mae and Freddie Mac are the largest source of housing finance in the United States. Their Congressional charters require each corporation to achieve public purposes that include providing stability and liquidity in the secondary mortgage market, providing secondary market assistance relating to mortgages for low- and moderate-income families, and promoting access to mortgage credit throughout the Nation, including under served areas.

In exchange for carrying out these public purposes, the GSEs are accorded various privileges that provide them with some benefits not available to other private corporations. These benefits include an exemption from state and local taxes (except property taxes) and conditional access to a $2.25 billion line of credit from the U.S. Treasury Department.

While the securities that the GSEs guarantee, and the debt instruments they issue, are explicitly not backed by the full faith and credit of the United States, such securities and instruments trade at yields only a few basis points over those of US Treasury securities with comparable terms, based on the belief of many investors that the Federal government would intervene if a GSE were to become insolvent. Consequently, the GSEs are able to fund their operations at lower costs than other private firms with similar financial characteristics.

Even though Fannie Mae and Freddie Mac are Congressionally chartered, they are also private, shareholder-owned corporations that have been regulated by HUD since 1968 and 1989, respectively. Both GSEs fund residential mortgages by purchasing loans directly from lenders, such as mortgage bankers and depository institutions, and holding these loans in portfolio or by issuing mortgage-backed securities (MBS) that are sold to a wide variety of investors in the capital markets.

The Secretary of HUD is the mission regulator for Fannie Mae and Freddie Mac, with oversight authority to ensure that both GSEs comply with the public purposes set forth in their Charters. An independent office of HUD, the Office of Federal Housing Enterprise Oversight (OFHEO), regulates both GSEs for safety and soundness by ensuring that they are adequately capitalized and operating their businesses in a financially sound manner.
In both cases you have rights up front and can always reject the deal if it’s not the best thing for you in the long run.

This is not the lightest of reading. Most people don’t know much, if anything, about HUD, Fannie Mae, or Freddie Mac even though they hear the names referenced in the news. This article continues here and is a good education on these government sponsored enterprises.

Ron J Howard
Homestone Mortgage
Senior Mortgage Banker/Broker
www.ronhowardseattle.com

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