The U.S. government is arguably the largest financial institution in the world. If you add the outstanding stock of government loans, loan guarantees, pension insurance, deposit insurance and the guarantees made by federal entities such as Fannie Mae and Freddie Mac, you get to about $18 trillion of government-backed credit. Through those activities, the government has a first-order effect on the allocation of capital and risk in the economy. Read More »
Today Fannie Mae and Freddie Mac–two government-sponsored enterprises originally designed to increase the availability of loans and thereby raise levels of home ownership–dominate the US mortgage lending market. Fannie Mae, which was established in 1938 as part of Franklin Delano Roosevelt’s New Deal, provides local banks with federal money to finance home mortgages. Freddie Mac, created in 1970, underwrites mortgages that fall below a certain size threshold with the intention of helping homeowners get access the housing market. These mortgages are cheaper since they implicitly–and after 2008 explicitly–benefited from a government guarantee.