Fannie Mae and Freddie Mac: History, Purpose, and Key Differences

Who exactly is Fannie Mae and Freddie Mac? Spoiler alert: they’re not people. They are two federal government programs that play a critical role in the U.S. housing market. They provide liquidity, stability, and affordability by purchasing mortgages from lenders. Understanding their history and function helps borrowers navigate the home financing system.

History and Purpose

Fannie Mae

Congress created Fannie Mae (Federal National Mortgage Association) in 1938 during the Great Depression. It was part of Franklin D. Roosevelt’s New Deal. The goal was to expand homeownership by ensuring banks had funds to lend. Initially, Fannie Mae was government-owned, but it became a private company in 1968.

Freddie Mac

Congress established Freddie Mac (Federal Home Loan Mortgage Corporation) in 1970. Lawmakers created it to increase competition in the secondary mortgage market. Unlike Fannie Mae, Freddie Mac focused on thrifts and small lenders.

How They Work

Both institutions buy mortgages from lenders, bundle them into mortgage-backed securities (MBS), and sell them to investors. This process provides liquidity, allowing lenders to issue more loans.

Similarities

Both programs share several key functions:

• Support Homeownership: Both help maintain a stable housing market.
• Buy Conventional Loans: They purchase mortgages that meet conforming loan limits and underwriting standards.
• Guarantee Mortgage-Backed Securities: They reduce risk for investors by backing MBS.
• Government-Sponsored Enterprises (GSEs): They operate as privately owned companies but have government oversight.

Differences

Though similar, they have distinct characteristics:

Conclusion

Fannie Mae and Freddie Mac ensure lenders can keep issuing mortgages. Though they have differences, both play vital roles in home financing.