Fannie Mae and Freddie Mac Explained
The Federal National Mortgage Association and Federal Home Loan Mortgage Corp., known as Fannie Mae and Freddie Mac respectively, are federally supported mortgage enterprises designed to offer liquidity to lenders for housing market support. While both entities are backed by the government, they operate differently. Fannie Mae was originally chartered in 1938 as a government body tasked with buying Federal Housing Administration mortgages from banks, thereby freeing up bank capital for further lending. This agency was created to counter the economic damage of the Great Depression and the resulting wave of foreclosures, helping to stimulate the market and increase homeownership.
In 1968, the government reorganized Fannie Mae into a shareholder-owned corporation that could also acquire conventional mortgages. Two years later, in 1970, Freddie Mac was created as a private company to buy any kind of mortgage from lenders. This action expanded the secondary mortgage market and contributed to lower interest rates. Freddie Mac later transitioned into a shareholder-owned company in 1989, distinguishing itself from Fannie Mae by purchasing loans from smaller lenders, whereas Fannie Mae typically buys from larger commercial banks. Both organizations set distinct borrower requirements, such as down payment amounts, and provide assistance programs for first-time homebuyers.
Specific examples of these programs include Fannie Mae’s HomeReady loan, which is available to buyers earning up to 80% of an area’s median income, and Freddie Mac’s Home Possible loan for those earning no more than the area’s median income. By guaranteeing the principal and interest payments on underlying mortgages, both firms attract more investors to the secondary market. This influx of capital makes more money available for housing and helps reduce borrowing costs. In periods of economic instability, these companies play a key role in stabilizing the mortgage and housing sectors.
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Following the 2008 financial crisis, it was reported that 90% of financing for new mortgages originated from Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system. However, the organizations also contributed to the crisis by guaranteeing a large share of single-family mortgages, totaling $300 billion in subprime loans. When banks ceased lending in 2007 without these guarantees, the two companies faced massive losses and insolvency risks. This situation persisted until the U.S. Treasury provided a bailout in 2008.
Consequently, the entities currently operate under the conservatorship of the Federal Housing Finance Agency. Currently, homeowners facing financial hardship due to Covid-19 who hold mortgages backed by these companies are shielded from foreclosure under the Cares Act and may qualify for mortgage forbearance. Fannie Mae and Freddie Mac continue to provide liquidity to lenders and play a vital role in the U.S. housing finance system, with their ongoing efforts viewed as key for maintaining the stability of the mortgage market.
