ABSTRACT
Fannie Mae and Freddie Mac often securitized the loans they purchased. That is, they assembled the loans into pools and issued mortgage-backed securities (MBSs). While selling most of the MBSs to insurance companies, pension funds, and other financial institutions, Fannie and Freddie retained some of the securities in their own investment portfolios. During the 1990s, Fannie and Freddie made a strategic decision to keep more of the mortgages they purchased. In 1983, Wall Street bankers issued only $10 billion of “private label” MBSs compared to nearly $230 billion issued by Fannie and Freddie. A year later, the Secondary Mortgage Market Enhancement Act made it easier for private companies to market their own MBSs. Whereas MBSs were supported by pools of residential mortgages; collateralized debt obligations were collateralized by pools of diverse assets such as residential mortgages, commercial mortgages, corporate bonds, automobile loans, and even credit card receivables.
