Which entity buys mortgages from private lenders for packaging into securities?

The correct answer is Fannie Mae, which plays a crucial role in the mortgage market. Fannie Mae, formally known as the Federal National Mortgage Association, buys mortgages from private lenders to provide them with liquidity. By purchasing these loans, Fannie Mae enables lenders to offer more mortgages to homebuyers, improving access to home financing.

Once Fannie Mae acquires these mortgages, it pools them together and securitizes them, creating mortgage-backed securities (MBS). These securities can then be sold to investors, thus generating capital that can be reinvested in new mortgage loans. This process not only increases the availability of mortgage funds but also helps stabilize the housing market and promote homeownership by making borrowing more affordable.

Each of the other entities mentioned has different roles in the financial system. The Federal Reserve focuses on monetary policy and may purchase government securities, while Freddie Mac also buys mortgages like Fannie Mae but is a separate entity. The Federal Housing Administration primarily insures loans rather than buying them, functioning to protect lenders from defaults on government-backed loans.