Kling provides some explanations of why Mortgage securitization is beneficial. Mortgage securitization has always had two major advantages. One is that it permits accounting gimmicks, such as moving mortgages off the government books and thereby lowering the official national debt. Similar accounting tricks occur with every major surge in securitization. The other major advantage of securitization is while the depository institutions (banks and savings and loan associations) have been restrained more firmly by state regulators or agencies in Washington, issuers of mortgage securities have been able to provide funds. Still, if the regulatory playing field had always been level, it is unlikely that securitization would have emerged (Kling, 2009).
Freddie Mac was created to ease financial restraints such as financial institutions back in the 1970's not being able to operate across state lines. The dominant mortgage lenders were bounded to the interest rates regulated by government, called regulation Q. Money market funds were less regulated, and of course siphoned money away from retail deposits. Freddie Mac was created by Congress to mismatch between savings in the East and mortgage demand in the West, with a goal of creating a national "secondary market" in mortgages (Kling, 2009).
To make the secondary mortgage market efficient, Freddie Mac stepped in to guarantee security holders against mortgage defaults. If a mortgage in a Freddie Mac security stopped making payments, Freddie Mac stepped in, pulled the mortgage out of the pool, and paid investors the full principal due on that mortgage. At that point, Freddie Mac would attempt to recover as much as it could through the foreclosure process. In the late 1970's, two executives at the bond trading firm Salomon Brothers, created a vision of a U.S. mortgage market dominated by securitization, which would enable investment banks to participate in the largest credit market in the world.