What is a primary function of Fannie Mae and Freddie Mac in the mortgage market?

Fannie Mae and Freddie Mac play a crucial role in the mortgage market primarily through the processes of standardization and providing liquidity. Their primary function is to provide stability and affordability in the housing market by purchasing mortgages from lenders. This not only helps to ensure that lenders have the capital they need to continue offering loans but also helps to standardize mortgage products, making it easier for consumers to understand their options.

By purchasing these loans, Fannie Mae and Freddie Mac bundle them into mortgage-backed securities, which they then sell to investors. This process increases the liquidity of mortgage investments, making it easier for banks and lenders to manage their cash flows and ultimately leading to more mortgage options for consumers. Standardization is critical because it helps ensure that mortgages follow consistent underwriting guidelines, which aids in risk assessment and promotes investor confidence.

Understanding this fundamental role helps illustrate why the other options are not as fitting. For example, increasing interest rates would typically be counter to their purpose of promoting accessibility and stability in the housing market. Direct lending to consumers does not happen; instead, they facilitate lending through the capitulated loans from lenders. Similarly, while they do have mechanisms to manage risk, they do not function as an insurance provider against defaults but rather as a support entity that enhances the