Who are Fannie Mae and Freddie Mac?
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. These two entities were established by the government to give the housing market a boost.
Fannie Mae is short for the Federal National Mortgage Association, while Freddie Mac stands for the Federal Home Loan Mortgage Corporation. Here, we discuss the essential details regarding these two organizations and how they can help you, along with 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 had the realization that he wanted to help citizens reach the American Dream of owning a home.
Fannie Mae then bought the loans from banks and gave them more money to lend. Next, Fannie Mae packaged the mortgages into mortgage-backed securities. It then sold these derivatives to protect its investors, pension funds, and other funds.
On the other hand, Freddie Mac was established by Congress in 1970, and like Fannie Mae, this company was a GSE that bought mortgages. However, unlike Fannie Mae, Freddie Mac can purchase any kind of mortgage — not just FHA loans. This organization also focuses on buying 30-year mortgages from banks. Furthermore, Freddie sells its mortgages to the secondary markets while Fannie holds on to all its mortgages.
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 purchases them from big commercial banks, Freddie purchases them from smaller banks. Each entity also provides varying 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.
Furthermore, as explained above, their origins and the original purposes for both organizations are also different.
What Do These Companies Do?
Both these companies have similar mandates, charters, and regulatory structures. Both buy mortgages from lenders and will either repackage them as a mortgage-backed security to be sold or hold them in their portfolios. Lenders will then take the money they make from selling these mortgages and use it to create more loans.
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 respond 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 under its charter, which is to 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.
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 homeowners in the U.S.?
- 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 had combined with the guarantee of keeping these companies afloat and sealed the deal on the collapse of the mortgage market.
When 2007 came, both Fannie Mae and Freddie Mac had started to lose many of their retained portfolios, specifically from their subprime 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.
As a result, the FHFA had put them both into conservatorship, where they received a bailout funding of $190 billion. While they have since paid it, both Fannie Mae and Freddie Mac remain in conservatorship.
Fannie Mae and Freddie Mac During COVID-19
If you’ve felt the impact of COVID-19 and have concerns regarding paying your rent or mortgage, you can get help through the state’s unemployment insurance program.
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 offers protection for homeowners carrying a Fannie Mae or Freddie Mac mortgage. Furthermore, the CARES Act prevents loan services and lenders from starting any kind of foreclosure against you. On February 16, 2021, the deadline for the CARES act was extended from February 28, 2021, to June 30, 2021 by President Biden.
You may request a forbearance on your mortgage for as long as 180 days, allowing you to potentially extend it for another 180 days should you have financial hardship as a result of the COVID-19 pandemic. Additionally, homebuyers can close loans during the pandemic, thanks to the FHFA placing more flexible appraisal and lending standards.
The Mortgage Relief Program by Fannie Mae
If you aren’t able to make your payment because of income reduction, job loss, or illness as a result of COVID-19, then your mortgage provider can provide you with relief, such as:
- Exemption from late fees during your forbearance period
- A plan for forbearance that suspends or lowers your mortgage 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 offers another program, called the Disaster Response Network which helps with other financial difficulties that come as a result of the COVID-19 pandemic. This program helps to provide access to HUD-approved housing counselors for renters in Fannie Mae-financed properties as well as homeowners with Fannie Mae-owned loans. These counselors can assist with creating personalized plans, provide financial coaching and advice on budgeting, and can give you support for as long as 18 months.
Mortgage Forbearance by Freddie Mac
If you’ve been directly or indirectly impacted by COVID-19, you may be eligible for help. Freddie Mac currently offers various relief options should you be unable to pay your mortgage as a result of a decline or loss in income, which includes:
- 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)
Both Fannie Mae and Freddie Mac are responsible for keeping the country’s mortgage market afloat and running, even through the COVID-19 crisis. Both entities purchase mortgages from different lenders to keep a reliable and steady stream of mortgage funding for families, individuals, and investors. Even in today’s housing industry, Fannie Mae and Freddie Mac are keeping a watchful eye on the pandemic situation, and work to protect the 28 million homeowners that have mortgages backed by them.