Definition
Freddie Mac and Fannie Mae are U.S government-sponsored enterprises focused on housing finance. Fannie Mae, established in 1938, and Freddie Mac, established in 1970, both provide liquidity, stability and affordability to the mortgage market by buying mortgages from lenders, which they either hold in their portfolios or package into mortgage-backed securities that are sold to investors. While they serve similar roles, they operate independently in different legal and corporate forms.
Key Takeaways
- Freddie Mac and Fannie Mae are government-sponsored enterprises that play an essential role in the U.S. housing market. They buy mortgages from lending institutions, bundle them into securities, and then sell those securities to investors, thereby providing liquidity to the lenders and stimulating the housing market.
- Although they perform similar functions, they are structured differently. Fannie Mae purchases mortgages from retail banks whereas Freddie Mac often purchases loans from smaller ‘thrift’ banks, giving it a slightly lower-profile role in the mortgage market.
- They also have different loan limits. In general, Fannie Mae and Freddie Mac can only purchase loans up to a certain amount, known as the ‘conforming loan limit’, which can vary reading on the area and the type of property.
Importance
Freddie Mac and Fannie Mae are crucial entities in the U.S. mortgage market because they help facilitate homeownership for many Americans.
Both are government-sponsored enterprises that buy mortgages from lenders, package them into mortgage-backed securities (MBS), and sell them to investors. Their operations provide liquidity to the mortgage market, ensuring that lenders have sufficient funds to issue new home loans.
Although they perform similar roles, they cater to slightly different markets, with Fannie Mae focusing more on long-term, fixed-rate mortgages and Freddie Mac purchasing more adjustable-rate mortgages. The stability and operations of Freddie Mac and Fannie Mae are essential for the health of the housing market and overall economy.
Explanation
Fannie Mae and Freddie Mac are both government-sponsored enterprises (GSEs) that serve critically important roles in the U.S. home mortgage market. The primary purpose of these entities is to provide liquidity, stability, and affordability to the housing market.
They do this by buying mortgages from lenders, giving those lenders the liquidity to make more home loans, and then either holding these purchased loans on their own books or repackaging them into mortgage-backed securities that are sold to global investors. By doing so, a continuous availability of mortgage funds across the various lenders and banks is ensured. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) differ in their establishment and origin.
Fannie Mae was created as a part of the New Deal during the Great Depression in 1938, while Freddie Mac came into existence in 1970 as a way to create competition and hence prevent monopoly in the secondary mortgage market. Furthermore, Fannie Mae typically purchases mortgages from larger commercial banks while Freddie Mac typically purchases loans from smaller banks and lenders. Regardless of their sources, both GSEs play an invaluable role in promoting homeownership and rental housing, basically aiming to make mortgage credit available across the United States to a wide range of borrowers.
Examples of Freddie Mac vs Fannie Mae
The 2008 Financial Crisis: This financial disaster made a significant difference with Freddie Mac and Fannie Mae. Prior to the crisis, both Freddie Mac and Fannie Mae had taken on risky loans that eventually collapsed with the housing bubble burst. The U.S. government seized control of both in September 2008 to prevent their total collapse. This government intervention truly highlighted the differences between the two organizations’ private and public functions.
Access to Home Mortgages: Both these entities have similar missions – to expand the availability of mortgages for all income brackets, but the ways they approach this can differ. For example, Fannie Mae directly works with potential homeowners for its HomeReady program which is designed to help low-income buyers with financing. Freddie Mac, on the other hand, tends to focus more on working with lenders to offer low down payment mortgages through its Home Possible program.
Differences in Loan Types: While both Freddie Mac and Fannie Mae buy conventional loans and provide guarantees to lenders, the types of loans they buy sometimes differ. For example, Fannie Mae might securitize loans from smaller banks while Freddie Mac might purchase loans from larger commercial banks. These operational differences can lead to differing impacts in the real estate market and for individual borrowers.
FAQs: Freddie Mac vs Fannie Mae
What is Fannie Mae?
Fannie Mae, or the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise (GSE) established in 1938 to expand the secondary mortgage market by pooling mortgages into mortgage-backed securities (MBS). This allows lenders to reinvest their assets into more lending, increasing the number of lenders in the mortgage market.
What is Freddie Mac?
Freddie Mac, or Federal Home Loan Mortgage Corporation (FHLMC), is a public government-sponsored enterprise (GSE) that was created in 1970. Similar to Fannie Mae, Freddie Mac was established to buy and pool mortgages, sell them as mortgage-backed securities, which provides more liquidity to the nation’s lenders.
What is the difference between Freddie Mac and Fannie Mae?
While both institutions have similar objectives, the main difference lies in the type of banks they work with. Fannie Mae tends to buy mortgage loans from commercial banks, while Freddie Mac usually buys its loans from smaller ‘thrift’ banks. But at the consumer level, they function very similarly.
Are Fannie Mae and Freddie Mac backed by the U.S. government?
Yes, both Fannie Mae and Freddie Mac are government-sponsored enterprises, which means they are backed by the government. While they were both initially established by the U.S. government, they were privatised and are now publicly traded companies.
Do Fannie Mae and Freddie Mac provide mortgages?
No, both Fannie Mae and Freddie Mac do not provide mortgages directly to consumers. Instead, they buy and guarantee mortgages from the mortgage lenders that originate them. This process allows lenders to free up capital to lend to more homeowners.
Related Entrepreneurship Terms
- Mortgage-Backed Securities (MBS)
- Government-Sponsored Enterprises (GSEs)
- Secondary Mortgage Market
- Conventional Loans
- Federal Housing Finance Agency (FHFA)
