What roles do Fannie Mae and Freddie Mac serve in the mortgage industry?

• A. They provide direct loans to consumers
• B. They collect mortgage payments for lenders
• C. They buy mortgages from lenders to increase liquidity
• D. They regulate mortgage interest rates

Answer: (C)

Fannie Mae and Freddie Mac play a crucial role in the mortgage industry by purchasing mortgages from lenders. This process increases liquidity in the mortgage market, allowing lenders to have more funds available to issue new loans. When Fannie Mae and Freddie Mac buy these mortgages, they bundle them into mortgage-backed securities (MBS) and sell them to investors. This not only provides lenders with capital to make additional loans but also helps stabilize and broaden access to the housing market, contributing to its overall functioning. By enhancing liquidity, these government-sponsored enterprises (GSEs) help ensure that mortgage credit remains available to consumers, which supports homeownership and promotes the stability of the housing market.