Fannie Mae—the U.S.’s Federal National Mortgage Association—and Freddie Mac—the U.S.’s Federal Home Loan Mortgage Corp.—were established by Congress to support the housing market by providing liquidity to lenders.
Both are federally backed mortgage companies.
However, they function in different ways.
Origins and Structure
Fannie Mae was chartered in 1938 as a government agency. It purchased Federal Housing Administration mortgages from banks, which in turn gave the banks more funds for lending. The agency was created in response to the Great Depression and the resulting mass foreclosures, which was a distinct period of economic struggle.
Fannie Mae bundled the loans it purchased into mortgage-backed securities, which it sold to funds and investors. The organization pioneered long-term fixed-rate mortgages that allow borrowers to refinance. In 1968, Fannie Mae was privatized and became a shareholder-owned company that could also buy conventional mortgages.
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Freddie Mac was established as a private company in 1970. Its purpose was to purchase any type of mortgage from lenders to expand the secondary mortgage market and lower interest rates.
By 1989, Freddie Mac had become a shareholder-owned company. It is distinct from Fannie Mae in that it purchases mortgages from smaller banks and lenders, while Fannie Mae buys mortgages from larger commercial banks.
Borrower Programs
The entities maintain different requirements for borrowers regarding down payments. They also offer specific programs for first-time buyers who need assistance purchasing a home. Fannie Mae’s HomeReady loan is designed for buyers who earn no more than 80% of an area’s median income. Freddie Mac has a Home Possible loan for buyers who make no more than an area’s median income.
Both organizations attract more investors to the secondary mortgage market by guaranteeing payment on principal and interest on underlying mortgages. Guaranteeing payments makes more funds available for housing and helps to decrease interest rates for borrowers.
The dominance of Fannie Mae and Freddie Mac in the mortgage market suggests that private capital is often unwilling to shoulder the risk of long-term fixed-rate loans without an implicit government guarantee.
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When the 2008 crisis exposed the fragility of this system, it became clear that the secondary market cannot function independently during severe downturns. The government’s absorption of losses effectively prevented a total freezing of credit.
Market Volatility and Crisis
During times of economic volatility, Fannie Mae and Freddie Mac help to stabilize mortgage and housing markets. However, they also played a role in the financial crisis of 2008. They had guaranteed a significant percentage of single-family mortgages in the U.S., including $300 billion in subprime loans.
In 2007, banks stopped lending without guarantees from Fannie and Freddie. Consequently, the companies began taking on huge losses.
They were at risk of becoming insolvent until they received a bailout from the U.S. Treasury in 2008. As a result, they are now under the conservatorship of the Federal Housing Finance Agency.
