The Skinny on Fannie Mae and Freddie Mac
You may have heard the Names “Fannie Mae and Freddie Mac” while dabbing into the mortgage world and have asked yourself, “Who are they?” In short, Fannie-Mae and Freddie-Mac are not people, but entities. Fannie Mae and Freddie Mac are called government-sponsored enterprises, or GSE’s, and they play a significant role in the mortgage industry. These roles include buying mortgages from lenders and selling them as securities to investors, as well as making additional home-buying programs possible. Fannie Mae is responsible for the Home Ready program, and Freddie Mac is responsible for the Home Possible program. There will be another blog post about these two programs, as they have different requirements. This section will be about Fannie Mae.
Fannie Mae
Fannie Mae, also known as the Federal National Mortgage Association, or FNMA, was founded in 1938 by Congress. It’s establishment, due to the Great Depression, was to help stimulate the economy by providing mortgages to medium-to-low income borrowers. Despite what people may think, Fannie Mae does not originate loans, which means you will never receive a mortgage directly from Fannie Mae. However, Fannie Mae purchases and sells them on the secondary market. The secondary market is a market where mortgage loans and servicing rights are bought and sold amongst banks, mortgage lending companies, and investors. By doing this, Fannie creates more liquidity for lenders, which allows them to provide and fund more mortgages to borrowers. These mortgages must meet strict criteria, which is may be influenced by the location of mortgage origination. For example, the limit for a loan has a cap, but this cap may be higher in California than it would be in Idaho.
Fannie Mae, after purchasing mortgages on the secondary market, will pool them together to form what is known as mortgage-backed securities, also known as MBS. A mortgage-backed security is an asset-backed security that is secured by a mortgage or collection of mortgages.
After the housing market crisis in 2008, Fannie Mae started to focus on Loan Modifications. Loan modifications were created to help change the conditions of an existing mortgage to prevent the borrowers from defaulting. These modifications can be a change to the interest rate, and/or extending the length of the loan, which would both help with lowering monthly payments. Even now, Fannie Mae is still developing programs to help facilitate easier mortgages for the low-to-mid income borrowers.
Freddie Mac
Freddie Mac, also known as the Federal Home Loan Mortgage Corporation, was established in 1970 by Congress to expand the secondary mortgage market. Similar to Fannie Mae, Freddie Mac does not originate loans but instead purchases them from primary lenders and packages them into mortgage-backed securities (MBS) to be sold on the secondary market. This process provides liquidity to lenders, allowing them to issue more mortgages to borrowers.
Like Fannie Mae, Freddie Mac plays a critical role in stabilizing the mortgage market and providing affordable housing opportunities. It also implements programs to assist homeowners facing financial hardship, such as loan modifications. These modifications may involve adjusting interest rates or extending loan terms to help borrowers avoid defaulting on their mortgages.
After the 2008 housing crisis, Freddie Mac, along with Fannie Mae, intensified its focus on implementing measures to prevent foreclosures and facilitate easier access to mortgages for low and moderate-income individuals. Today, Freddie Mac continues to evolve its programs and policies to support a stable and sustainable housing market for all.
