Is this Fannie Mae and Freddie Macs business model?

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I'm trying to understand what they do. This is how I understand it, please correct me if I'm wrong or tell me if I'm right.

A homebuyer recieves a loan from a private bank for 100 K at 6.5 % interest. The bank then sells the mortgage to Fannie Mae or Freddie Mac keeping a small percentage of the interest, say 2%. Then Fannie Mae or Freddie Mac takes over the mortgage and keeps the remaining 4.5 %. Let's say they borrowed their money from foreign Govt.'s at 4.0%, then they have an arbitrage deal where they keep the remaining .5% as profit.

Is this a good example of how they work? Obviously they assume more risked but they do so because they are backed by the govt. Do banks essentially act as middlemen in this situation? If my example is wrong would someone please right out a better one? Thanks

Is this Fannie Mae and Freddie Macs business model?

I was think you have most of it right but for two things.

1. I beleive the banks sells loans to Fannie Mae outright, say maybe the sell the loan for $102K

2. The reason Fabbue Mae can assume the risk is not because the are backed by the government but because Fannie Mae handles so many loans, that there is a economic of scale.

The following is from the Fannie Mae site.

"In order to fund the mortgages Fannie Mae buys, they issue debt securities to investors. A significant part of their earnings is derived from the difference between the yield on those mortgages and the cost we endured to buy them. When we issue MBS, we guarantee that investors will receive timely principal and interest payments regardless of what happens to the underlying mortgages. In return for the guaranty, we earn a fee. These fees are another source of Fannie Mae's income."

Is this Fannie Mae and Freddie Macs business model?

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