The Federal National Mortgage Association (commonly known as "Fannie Mae") and the Federal Home Loan Mortgage Corporation (commonly known as "Freddie Mac") are two of the ten largest companies in the United States measured by assets. 1 While they are for-profit, privately owned mortgage finance companies whose shares trade on the New York Stock Exchange, they are also two of the few companies directly chartered by Congress. 2 Congress created them to develop a liquid national market for

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... ial mortgages in order to encourage homeownership. 3 The privileges attendant to this special relationship with the federal government has been the source of their competitive advantage in the American residential mortgage market. 4 Fannie and Freddie primarily engage in two activities. First, they help mortgage originators package their mortgages into residential mortgage-backed securities (RMBS) by providing credit guarantees for those securities. This helps maintain a stable and liquid market for RMBS. Second, the two companies raise capital by issuing debt securities and use those funds to purchase mortgages and related securities. Fannie and Freddie have historically profited in this second line of business because of the spread between their low cost of capital and the amount that they must pay for the mortgage