Who Are Fannie Mae and Freddie Mac?

If you’ve been looking to purchase a new home or are thinking about getting one, chances are that you’ve heard of Fannie Mae and Freddie Mac, and you’re probably wondering who they are. The question isn’t who they are, but what they are. The government established these two entities to give the housing market a boost. 

Here, we discuss the essential details regarding these two government-sponsored enterprises (GSE) and how they can help you. Discover the other things that you need to know about what Fannie Mae and Freddie Mac are. 

The History of Fannie Mae and Freddie Mac

These two entities had quite a different beginning from each other but serve a similar purpose. In 1938, Fannie Mae was established by Congress via the Federal Home Loan Bank Act. It all started when President Franklin D. Roosevelt wanted to help citizens reach the American Dream of owning a home. The Great Depression pushed purchase prices and interest rates on loans beyond affordability for most Americans. 

Fannie Mae bought the loans from the Federal Housing Administration (FHA) and later, private banks. The purchase gave these mortgage originators more money to lend. Next, Fannie Mae packaged the mortgages into mortgage-backed securities (MBS). It then sold these derivatives to protect its investors, pension funds, and other funds. 

However, to buy the home loans, they must meet specific requirements. Loans that meet these established guidelines–like being under the loan limit, borrower credit scores, and down payment amount–are called conforming loans. Thanks to Fannie Mae, we have long-term, fixed-rate mortgages with the option to refinance. That option has helped many first-time home buyers gain access to homeownership.

Freddie Mac was established by Congress in 1970, and like Fannie Mae, this company is a GSE that buys mortgages. However, unlike Fannie Mae, Freddie Mac’s intent was to expand the MBS and secondary mortgage market. It can purchase any kind of mortgage — not just FHA loans and conventional loans. This organization also focuses on buying 30-year mortgages from banks, partially smaller banks and underserved companies.

Fannie Mae is short for the Federal National Mortgage Association (FNMA), while Freddie Mac stands for the Federal Home Loan Mortgage Corporation (FHLMC).

Note these are government-sponsored agencies, not government agencies. That would be the Federal Housing and Finance Administration (FHA). Some government agencies do back home loans, like the United States Department of Agriculture (USDA) and the Veterans Administration (VA).

Key Takeaway: Fannie Mae and Freddie Mac turn individual loans into bonds, freeing up lenders to extend more credit and, by extension, more home loans.

What Is the Difference Between the Two? 

The biggest difference between these two entities is that they buy their mortgages from different sources. While Fannie Mae purchases them from big commercial banks, Freddie Mac purchases them from smaller banks. Fannie Mae tends to have more single-family homes in its portfolio. Freddie Mac is more open to multifamily housing. Each entity also provides varying mortgage programs for individuals and families who can’t make big down payments. 

For example, Fannie Mae offers the Home Ready Loan, where applicants can only qualify if they don’t earn more than 80% of the median income from their area. Freddie Mac offers the Home Possible Program, which requires applicants to live inside the home without earning more than the average income in their area. The loan programs target affordable housing for low-income earners.

Furthermore, as explained above, their origins and the original purposes for both organizations are also different. 

Additionally, Fannie Mae is a publicly traded GSE while Freddie Mac is in the hands of private shareholders.

What Do These Companies Do?

Both these companies have similar mandates, charters, and regulatory structures. The FHFA and Department of Housing and Urban Development (HUD) regulate their business practices. The latter controls the size of their mortgage investment portfolios while the former oversees their housing mission.

They buy mortgages from lenders and mortgage companies. They will either repackage them as a mortgage-backed security to be sold or hold them in their portfolios.

Mortgage lenders then take the money they make from selling these mortgages and create more mortgage loans. It creates a continuous cycle where they have access to funds to loan American homeowners. Loan guarantees incentivize lenders to offer 30-year, fixed-rate mortgages because they fit the conforming loan limits set by these government-sponsored entities. That helps give more accessibility to homeownership.

This cycle helps families, individuals, and investors with a steady and continuous stock of mortgage funding. Moreover, both of these entities are required to carry out the following: 

• Appropriately adjust their strategies to the private capital market.
• Maintain the stability for residential mortgages in the secondary market.
• Increase the liquidity of mortgage investments while promoting access to mortgage credit, along with making money available for financing residential mortgages. 
• Provide ongoing support for residential mortgages in the secondary market. 
• Additionally, Fannie Mae has one more responsibility Freddie Mac does that. It must liquidate and manage federally-owned mortgage portfolios. Doing this will minimize losses to the federal government and lessen any adverse effects on the residential mortgage market.

What Fannie Mae and Freddie Mac Don’t Do

Neither of these enterprises originate home loans. They buy loans from banks, credit unions, and mortgage companies. Nor do they service your loan–meaning they don’t manage your monthly mortgage payments.

Freddie Mac does have a business arm that provides loan funding for multifamily properties. Its goal is to provide funds so low-to-moderate income earners have affordable apartment homes.

Fannie Mae and Freddie Mac During the Housing Crisis of 2008

Because Fannie Mae and Freddie Mac had a funding advantage over all of their rivals on Wall Street, the two made a sizable profit throughout their reign in the 1990s and early 2000s. However, during this time, financial market professionals, economists, and government officials had frequent debates regarding the two organizations.  

Questions also grew rampant on the case of Fannie and Freddie, such as: 

• Did Fannie’s and Freddie’s government backing truly help U.S. homeowners?
• Was the government only helping the companies and those invested in them? 

At the time, Fannie Mae and Freddie Mac had monopolized a large segment of the country’s secondary mortgage market, as sponsored by the government. However, this monopolization, combined with the guarantee of keeping these companies afloat, contributed to the mortgage market collapse. 

When 2007 came, both Fannie Mae and Freddie Mac had started to lose many of their retained portfolios, specifically from their subprime loans and Alt-A investments. By 2008, the sheer volume of their mortgage guarantees and retained portfolios had guaranteed their bankruptcy to the FHFA. By September of that year, the market had believed that both firms were suffering from financial trouble. Corrupt accounting practices were brought to light. It was part of the wider financial crisis brought on by loose mortgage industry practices. 

As a result, the FHFA had put them both into conservatorship, where they received a $190 billion bailout of federal funds. While they have since paid back the bailout to the US Treasury, both Fannie Mae and Freddie Mac remain in conservatorship. Housing finance agencies continue to oversee the housing policies guiding these GSEs.

While they have since paid back the bailout to the US Treasury, both Fannie Mae and Freddie Mac remain in conservatorship.

Fannie Mae and Freddie Mac During COVID-19 

During the height of the COVID-19 pandemic, many homeowners found they could not make their payment requirements due to the financial conditions of that time.

In response, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was created to temporarily boost the unemployment insurance benefits of those affected by the pandemic through these three programs: 

• Pandemic Emergency Unemployment Compensation (PEUC)
• Pandemic Unemployment Assistance (PUA)
• Federal Pandemic Unemployment Compensation (FPUC)

This act also protected homeowners carrying a Fannie Mae or Freddie Mac mortgage. It prevented loan services and lenders from starting any kind of foreclosure or eviction proceedings. On February 16, 2021, the deadline for the CARES Act was extended from February 28, 2021, to June 30, 2021, when it expired.

The act enabled homeowners to apply for a forbearance on mortgage payments for as long as 180 days, and to potentially extend it for another 180 days. The repayment plans allowed for gradual payments of principal or a loan modification plan. The idea was foreclosure prevention, as that could stress the housing market more than adjusting repayment terms.

Additionally, homebuyers could close loans during the pandemic, thanks to the FHFA placing more flexible appraisal and lending standards. 

The Mortgage Relief Program by Fannie Mae

During the economic downturn initially caused by the global shutdown, Fannie Mae-owned loans enabled mortgage providers to provide some relief, such as: 

• Exemption from late fees during a forbearance period
• A plan for forbearance that suspended or lowered mortgage payments for as long as 12 months
• Eviction and foreclosure relief
• Options for repayment after your forbearance period that includes a repayment plan that will help you to catch up or a loan modification plan to lower your monthly payment

Fannie Mae also offered another program, called the Disaster Response Network which helped with other financial uncertainties resulting from the COVID-19 pandemic. The program expanded access to housing counselors for renters in Fannie Mae-financed properties as well as homeowners with Fannie Mae-owned loans.

Mortgage Forbearance by Freddie Mac

Freddie Mac offered various relief options for those who experienced a decline or loss in income, which included: 

• Waiving late fees and penalties
• Mortgage forbearance of up to 12 months
• Loan modification options to keep payments the same or to lower payments after the forbearance period
• A complete stop on all evictions and foreclosure actions (was only effective until March 31, 2021)

Appraisal and Lending are More Flexible During this Time

During the pandemic, Fannie Mae and Freddie Mac implemented the easing of appraisal and lending standards for homebuyers who wish to apply for a mortgage. Furthermore, this was extended from the previous deadline of February 28, 2021 to March 31, 2021 by the FHFA. Here, the two companies allow: 

• The expansion of the use of power of attorney, such as e-signatures to help you with loan closings
• Alternative methods to document income and verify employment before closing the loan (such as employment verification through email)
• Alternative refinance loans and appraisals on purchase (such as online appraisals and drive-bys)

Understanding Fannie Mae and Freddie Mac 

Fannie Mae and Freddie Mac are responsible for keeping the country’s mortgage market afloat and running, even through an economic crisis. Both entities purchase mortgages from private lenders to keep a reliable and steady stream of mortgage funding for families, individuals, and investors. Fannie Mae and Freddie Mac work in tandem with government agencies to protect the 28 million homeowners who have mortgages backed by them.

FAQs

Where does Fannie Mae get its money?

The US Stock market and bond market funds Fannie Mae’s operations. It purchases mortgage loans that meet its standards and bundles them for sale as mortgage-backed securities to investors. Fannie Mae assumes the credit risk on the loans. In 2023, the GSE provided $369 billion in liquidity to the mortgage market, purchasing 805,000 single-family home loans and leading to the financing of 482,000 multifamily rental units. It earned $17.4 billion in net income.

Where does Freddie Mac get its money?

Freddie Mac also buys home loans that meet specific criteria and create mortgage securities to sell to investors. That shifts the credit risk to these private parties. It operated a single-family and multi-family business segment. They also issue corporate debt securities by purchasing mortgage-related securities as investments. Parties that invest in Freddie Mac securities include pension funds, insurance companies, and commercial banks. It also generates income through guarantee fees and loan-level price adjustment fees.

Is Fannie Mae an FHA loan?

FHA loans come from the Federal Housing Administration. They support low-income borrowers with more relaxed borrower requirements, such as a lower down payment. The FHA insures its own loans. Fannie Mae does not insure or underwrite loans; it purchases loans from lenders that meet specific criteria regarding loan terms, down payment and borrower qualifications.

What does it mean if a home is owned by Fannie Mae?

Sometimes Fannie Mae does foreclose on properties. Fannie Mae-owned properties are sold through its HomePath program. These homes are sold as-is and can present affordable housing opportunities. The program allows downpayment as low as 3% if you qualify for a HomeReady housing loan. The purchase process may take longer, and there are specific purchase and borrower requirements. Fannie Mae also does not maintain these homes once it possesses the deed, so keep that in mind.

What credit score does Fannie Mae and Freddie Mac require?

The minimum credit score for a fixed-rate conforming loan being sold to either GSE is 620. Adjustable-rate mortgages for manually underwritten loans have a minimum loan eligibility score of 640.

Is Fannie Mae the owner of my mortgage?

Homeowners may receive a letter stating Fannie Mae has purchased the home loan. It is an informational letter. Your mortgage servicer and loan terms stay exactly the same. You will not send monthly mortgage payments to Fannie Mae or Freddie Mac.

What are non-conforming loans?

Non-conforming loans are simply those that don’t meet Fannie Mae or Freddie Mac’s purchase criteria. It could be the loan exceeds the maximum loan amount set for that year or the borrower is deemed to be a high risk. It could also be an affordable lending product backed by a government agency like the USDA and VA with more generous lending terms like low down payments. Conforming loan limits change yearly in response to real estate market prices, housing affordability, and economic conditions like inflation.

Updated October 2024