As a consequence, market participants offer to purchase GSE debt at interest rates substantially lower than those required of comparably situated financial institutions without direct ties to government.2 Given this advantage, which private competitors have been unable to fully overcome, the housing-related GSEs have grown rapidly in recent years.
Fannie and Freddie essentially dominate the market for purchasing conforming home mortgage loans.3 The strong belief of investors in the implicit government backing of the GSEs does not by itself create problems of safety and soundness for the GSEs, but it does create systemic risks for the U.S. financial system as the GSEs become very large.