U.S. housing finance companies Fannie Mae and Freddie Mac are making riskier deals as they increasingly purchase mortgages from smaller lenders, a federal watchdog said on Thursday.

The government-owned companies do not lend money directly, but underpin the U.S. housing market by guaranteeing most new mortgages in the country.

The Federal Housing Finance Agency Office of Inspector General said in a report that the purchases from smaller lenders raises the exposure of the two companies.

“Smaller and non-bank lenders may have relatively limited financial capacity,” the watchdog said. “The enterprises face an increase in the risk that those counterparties could default on their financial obligations.”

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