New data shows that if the U.S. government had not rescued Fannie Mae and Freddie Mac, the secondary mortgage market would have collapsed, leaving the housing market in worse shape with a virtual halt on mortgage lending.

In the last year, Fannie and Freddie Mac provided $1.1 trillion in new mortgage credit, while private mortgage-backed securities issuance fell from $900 billion to nothing, according to the Federal Reserve’s Flow of Funds data.

"A surge in agency (Fannie and Freddie) issuance has offset a total collapse in ‘private’ MBS issuance," according to the "Follow the Money" blog written by Brad Setser for the Council on Foreign Relations — private MBS refers to mortgage-backed securities that did not have a guarantee from the secondary mortgage entities. "Agency lending has been absolutely essential," he writes.

In February of this year, the Office of Federal Housing Enterprise Oversight, which regulated Fannie and Freddie, lifted restrictions on the amount of mortgages the government-sponsored companies could hold on their books. Loan limits were also increased last fall.

The federal takeover earlier this month, while controversial, was necessary to avoid even more serious problems with the housing market. While Fannie and Freddie are owned by the U.S. government and have a much skinnier footprint, they are central to the housing market stabilizing.

At their peak, Freddie and Fannie purchased about 50 percent of the $12 trillion mortgage market. While the private MBS market backed much riskier loans, the bloated portfolio of the two agencies is what got them into trouble as the housing market collapsed.

Both agencies have been reined in with new management and a revived public purpose: to fund the mainstream housing market.

***

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