Set up by the federal government — Fannie in 1938, Freddie in 1970, are now public companies, their stock traded on the open market.  They buy mortgages away from the banks that already hold them, providing cash that allows banks to make more home loans and take on more debt. Then Fannie and Freddie bundle the loans together and sell pieces of the whole to investors as what are called mortgage-backed securities. They pay a guaranteed rate of return — like Treasury bonds, but more lucrative for investors.  Each are backed with a $2.25 billion line of credit from Uncle Sam, our government. Fannie and Freddie have been essential to the functioning of the U.S. housing market and helped homeowners by pumping enough transactions through the market to lower interest rates.