Starting Monday, the U.S. government is making what’s widely described as the biggest change in a generation to the inner workings of the roughly $4.4 trillion market in mortgage-backed securities issued by the country’s two housing market giants, Fannie Mae and Freddie Mac. This change could mean lower housing costs for millions of Americans – or higher ones, depending on whom you ask.
They package lenders’ mortgages into bonds known as mortgage-backed securities and guarantee the underlying loans. The bonds essentially shunt monthly principal and interest payments from a multitude of homeowners over to investors. The process lets lenders free up their balance sheets to issue new mortgages, while offering the market large quantities of what for years were seen as extremely safe investments. The system melted down in the 2007-2008 financial crisis, forcing the government to take direct control over the pair. Fannie and Freddie quickly rebounded, and their so-called agency MBS fuel the deepest and most liquid U.S. debt market after Treasuries.