Which of the following is true regarding the role of Fannie Mae and Freddie Mac?

• A. They primarily serve as mortgage insurers
• B. They provide funding by purchasing mortgages from lenders
• C. They set interest rates for home loans
• D. They offer mortgage loans directly to homeowners

Answer: (B)

Fannie Mae and Freddie Mac play a critical role in the mortgage market by providing liquidity and stability. They accomplish this by purchasing mortgages from lenders, which allows these lenders to free up their capital for additional lending. This process is vital because it ensures that banks and financial institutions have sufficient funds to continue offering loans to consumers, thus supporting the broader housing market and economy.

The purchasing of mortgages also involves bundling these loans into mortgage-backed securities, which are sold to investors. This mechanism helps reduce the risk for lenders and enables them to lend more aggressively, knowing they can sell off the loans they originate. This function of providing funding by purchasing mortgages is fundamental to Fannie Mae and Freddie Mac's purpose, helping maintain accessible home financing options for borrowers.