THE IMPACT OF SECONDARY MORTGAGE MARKET GUIDELINES ON AFFORDABLE AND FAIR LENDING: A RECONNAISSANCE FROM THE FRONT LINES Kenneth Temkin Roberto G. Quercia George C. Galster BACKGROUND Two government sponsored enterprises (GSEs) play a dominant role in housing finance markets: Fannie Mae and Freddie Mac. In 1998, Fannie Mae and Freddie Mac purchased $621 billion in single family mortgages, representing 45 percent of total mortgage originations for that year (Of- fice of Federal Housing Enterprises Oversight, 1999). Since so many loans are sold to the GSEs, primary lenders, including commercial banks, thrifts, and especially mortgage companies~ewhich sell all of their loans to the secondary market~ehave strong incentives to adopt the GSEs' un- derwriting and appraisal guidelines. While Fannie Mae and Freddie Mac do not originate mortgages, their underwriting guidelines determine who can qualify for conventional mortgage loans (MacDonald, 1995). Although Fannie Mae and Freddie Mac are privately held companies, their charters confer explicit benefits that lower the companies' operating costs. For example, Fannie Mae and Freddie Mac do not have to pay Security and Exchange Commission fees, since they do not have to regis- ter their securities with that agency. Moreover, Fannie Mae and Freddie Mac are not required to pay state and local income taxes, and have a conditional $2.25 billion conditional line of credit with the U.S. Treasury (GAO, 1996). These explicit charter benefits, according to GAO (1996) saved Fannie Mae and Freddie Mac between $330 and $470 million per year in operating expenses. These benefits are small in comparison to the subsidy gained by inves- tors' perceptions that Fannie Mae and Freddie Mac are "too big to fail."