In the grand scheme of the mortgage industry, Fannie Mae and Freddie Mac are the money movers. They act as intermediaries between the end-investors who purchase large blocks of mortgages called mortgage backed securities (MBSs), and lender companies or individuals who lend mortgage money to the general public.
Freddie and Fannie are GSEs: Fannie and Freddie are financial services corporations, known as government sponsored entities (GSEs) and are highly regulated by the federal government. Here is how the process works: Investors send money to Fannie and Freddie. These two GSEs send this money to lenders, who, in turn, find people who are looking to finance homes.
Selling MBSs: Once the loans close, the lenders send the mortgages to Fannie and Freddie. They, in turn, bundle them together into MBSs. The mortgages are then sent on to investors, who may decide either to hold onto them or to sell them again. Individual and bundled mortgages may be sold multiple times during their lifetimes, often internationally.
Criteria for purchasing: There are many criteria that investors can use when they decide to purchase mortgage-backed securities. They can choose a program such as FHA, for example, and specifically select the type of MBSs, such as fixed or adjustable rate loans, or buyers with certain credit scores or requiring certain loan amounts.
The cycle continually repeats itself, with the investors sending more money to Fannie and Freddie, who send it to the lenders … and on it goes.