Mortgage Finance (Concurrent Developments): Emergence of the GSEs and Rapid Evolution of the Secondary Mortgage Market
*This post is a part of a series of posts I have written. To start from the beginning, click [shorturl.at/hsF48].
In 1970, the U.S. government created the Federal Home Loan Mortgage Corp. (Freddie Mac). The U.S. government also expanded the charter of the Federal National Mortgage Corp (Fannie Mae), allowing the latter to purchase conventional mortgages for the first time.
A key element of their mission was to create and support an active secondary market for mortgages, thereby improving the liquidity in the housing sector. Those government-sponsored enterprises (GSEs) would buy loans from banks, thrifts and wholesale mortgage originators.
The GSEs would then package these loans into securities, often called pass-through certificates, thus assuming the credit risk for a small portion of the coupon.
These securities became enormously popular with institutional investors seeking customized cash flows…
