The American housing finance system operates differently than most people assume. When a homebuyer takes out a mortgage, the lender often sells that loan within weeks or months. The buyer never knows, and from their perspective, nothing changes—they continue making payments to the same servicer. But behind the scenes, the loan has entered the secondary mortgage market, a system that connects local lending to national and global capital flows. At the center of this system sit a handful of government-sponsored entities, or GSEs, whose influence over real estate finance is difficult to overstate.
Understanding these entities matters for anyone involved in real estate. They shape mortgage availability, influence interest rates, set underwriting standards, and determine which borrowers can access credit on favorable terms. The 30-year fixed-rate mortgage—a product that defines American homeownership—exists in large part because of the secondary market infrastructure these entities created and maintain.
The Secondary Mortgage Market
Before the 1930s, mortgage lending was a local affair. Banks and savings institutions made loans using deposits from their communities, and those loans stayed on their books until maturity. This model had obvious limitations. A bank could only lend as much as it had in deposits, and a 20- or 30-year mortgage tied up capital for decades. If a regional economy weakened, local lenders could find themselves overexposed with no mechanism to distribute risk.
The secondary mortgage market changed this dynamic. By allowing lenders to sell loans after origination, the secondary market freed up capital for new lending and distributed risk across a broader base of investors. A bank in Ohio could originate a mortgage, sell it to an entity in Washington, and use the proceeds to fund another loan the following week. The mortgage, meanwhile, might be pooled with thousands of others and sold to pension funds, insurance companies, or foreign investors as a mortgage-backed security.
This system dramatically expanded the availability of mortgage credit. It also created standardization. For loans to be sellable, they needed to meet certain criteria—documentation requirements, debt-to-income thresholds, property standards. The entities that purchased these loans became de facto regulators of mortgage underwriting, even as they operated outside traditional regulatory channels.
Fannie Mae
The Federal National Mortgage Association, known as Fannie Mae, was established in 1938 as part of President Franklin Roosevelt’s New Deal reforms. Its original purpose was to purchase mortgages insured by the Federal Housing Administration (FHA), providing lenders with liquidity so they could issue new loans. At a time when the country was still recovering from the Great Depression and mortgage credit had largely dried up, Fannie Mae represented a federal commitment to housing finance.
For its first three decades, Fannie Mae operated as a government agency. In 1968, Congress restructured it as a privately owned, publicly traded corporation—a government-sponsored enterprise. The change allowed Fannie Mae to raise capital in private markets while retaining a federal charter and an implicit government guarantee. Investors understood that the government was unlikely to let Fannie Mae fail, which allowed it to borrow at rates only slightly above Treasury securities.
Today, Fannie Mae purchases and guarantees conventional mortgages that meet its underwriting guidelines. These “conforming” loans must fall below certain size thresholds—currently $766,550 in most markets, with higher limits in designated high-cost areas. Loans that exceed these limits are considered “jumbo” loans and cannot be sold to Fannie Mae. The company packages the mortgages it acquires into mortgage-backed securities (MBS), which it sells to investors with a guarantee of timely payment of principal and interest.
Freddie Mac
The Federal Home Loan Mortgage Corporation, known as Freddie Mac, was created by Congress in 1970 to provide competition in the secondary market. While Fannie Mae had originally focused on FHA-insured loans, Freddie Mac was designed to support conventional mortgages originated by savings and loan associations, which dominated residential lending at the time.
Freddie Mac introduced the concept of standardized mortgage-backed securities, allowing thousands of individual loans to be bundled and sold to investors as a single instrument. This innovation expanded the investor base for mortgage debt and helped establish the infrastructure that now supports trillions of dollars in housing finance.
In practice, Fannie Mae and Freddie Mac perform similar functions. Both purchase conforming conventional loans, both issue mortgage-backed securities, and both operate under federal charters with implicit government backing. Lenders can sell eligible loans to either entity, and the choice often comes down to minor differences in pricing or underwriting requirements. Together, the two companies guarantee roughly half of all outstanding residential mortgage debt in the United States.
Ginnie Mae
The Government National Mortgage Association, known as Ginnie Mae, differs from Fannie Mae and Freddie Mac in important ways. When Fannie Mae was privatized in 1968, the government retained certain functions under a new entity that would remain fully government-owned. Ginnie Mae is that entity—a government corporation housed within the Department of Housing and Urban Development (HUD).
Ginnie Mae does not purchase mortgages or issue its own mortgage-backed securities. Instead, it guarantees the timely payment of principal and interest on MBS composed of loans insured or guaranteed by federal agencies—primarily FHA loans, VA loans (guaranteed by the Department of Veterans Affairs), and USDA rural housing loans. Private lenders originate these government-backed loans, pool them into securities, and sell them to investors. Ginnie Mae’s guarantee provides the assurance that investors will receive their payments regardless of borrower defaults.
Because Ginnie Mae securities carry the full faith and credit of the United States government—unlike the implicit guarantee behind Fannie Mae and Freddie Mac—they trade at a slight premium and are considered among the safest fixed-income investments available. This backing helps ensure that credit remains available for borrowers who use government-insured loan programs, including first-time buyers with limited down payments and veterans.
The Federal Housing Administration
The Federal Housing Administration (FHA) is often discussed alongside GSEs, though it operates differently. Created under the National Housing Act of 1934, the FHA does not lend money directly. Instead, it insures mortgages made by private lenders, protecting those lenders against borrower default. If a borrower stops paying, the FHA compensates the lender, reducing the risk of mortgage lending and encouraging lenders to offer credit to borrowers who might otherwise be denied.
FHA insurance enabled the low-down-payment, long-term mortgage to become standard. Before the FHA, mortgages typically required 50 percent down payments with terms of five to ten years, followed by a balloon payment. The FHA’s willingness to insure longer-term, fully amortizing loans transformed the market. Today, FHA loans remain popular among first-time homebuyers and borrowers with lower credit scores, as they allow down payments as low as 3.5 percent.
The FHA’s history includes troubling chapters. Its early underwriting manuals explicitly discouraged lending in racially mixed or predominantly Black neighborhoods, codifying discriminatory practices that shaped American cities for generations. While those policies were eventually abandoned, their effects persisted in patterns of segregation and wealth inequality that remain visible today.
Conservatorship
The financial crisis of 2008 exposed the risks embedded in the housing finance system. While Fannie Mae and Freddie Mac did not originate subprime loans directly, they had purchased large quantities of private-label mortgage-backed securities that contained subprime mortgages. They had also loosened their own underwriting standards during the mid-2000s as they competed for market share with private securitizers.
When the housing market collapsed and defaults surged, Fannie Mae and Freddie Mac faced billions in losses. On September 6, 2008, the federal government placed both entities into conservatorship under the newly created Federal Housing Finance Agency (FHFA). The Treasury committed up to $400 billion to support them, and both companies drew heavily on that commitment in the years that followed.
Conservatorship was intended as a temporary measure, but it continues today. During the period when private capital retreated from mortgage markets, Fannie Mae, Freddie Mac, and the FHA filled the gap—at one point backing over 90 percent of new mortgage originations. As the housing market recovered, both GSEs returned to profitability and have since paid the Treasury more than $300 billion in dividends, exceeding the assistance they received. Yet questions about their long-term structure remain unresolved, and proposals to reform or wind down the GSEs have stalled repeatedly in Congress.
Conclusion
For real estate investors, GSEs influence financing in several concrete ways. Conforming loan limits determine which properties can be financed with GSE-backed mortgages and which require jumbo or portfolio loans with different terms and pricing. In markets where home prices have risen sharply, buyers may find themselves above conforming limits, facing higher interest rates or stricter underwriting requirements.
Multifamily investors also interact with these entities. Both Fannie Mae and Freddie Mac operate substantial multifamily lending programs, purchasing and securitizing loans on apartment buildings. These programs offer competitive rates and standardized terms that have helped fuel investment in rental housing. Understanding the requirements and limits of GSE multifamily programs can expand financing options for investors in this space.
More broadly, GSEs shape the environment in which all real estate transactions occur. Their underwriting standards influence what lenders will accept, their pricing affects mortgage rates across the market, and their policies determine which borrowers can access credit easily and which face additional hurdles. Any investor seeking to understand the mechanics of real estate finance will eventually need to reckon with the central role these entities play.