What in the world are Freddie Mac and Fannie Mae?
By Cynthia E. Brodrick • Bankrate.com

Whether you've gone through the home-buying process or have just begun your research, the names Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) have probably been thrown in your direction. Freddie Mac and Fannie Mae are trillion-dollar, publicly held corporations that link your local bank, Wall Street and the federal government.

The connection begins when a home buyer finances his house through his bank. In the background, the government-chartered private corporations, Freddie Mac and Fannie Mae, purchase the loan. Freddie and Fannie then package a bunch of mortgages into a security to be sold to big investors. "Big" meaning an investor who has about a quarter million dollars to kick around.

The bank uses the money it got from Freddie or Fannie to fund new home mortgages for other home buyers. Freddie and Fannie use the cash they got from investors to buy more mortgages. The investors make their profit from the interest the home buyers pay on their mortgages.

This is not an evil conspiracy -- if you want to know if your loan has been bought, you can just ask your lender. It's not a secret; it's just that Freddie and Fannie do their work quietly.

Both are committed to encouraging homeownership. They often work with nonprofits to educate consumers about the scary process of applying for a mortgage, and to encourage those with good credit and not necessarily high income to buy a home.

"Neighborhoods with homeowners have more voters. The neighborhood is safer. People take care of their lawn and house. They participate in civic activities," explains Janice Daue, vice-president of public affairs for Fannie Mae, in Washington D.C.

Though most Americans may not be aware of these behind-the-scenes machinations of Freddie Mac and Fannie Mae, they do benefit. Consumers enjoy lower mortgage interest rates, readily available home mortgage credit and reduced origination costs. Additionally, because these two make mortgage money available in all parts of the country, interest rates are steady and stable everywhere, small town or city.

Freddie and Fannie also offer special affordable mortgage programs that allow low-down payment requirements for people who might not qualify otherwise, such as low- and moderate-income families.

And the services provided by these two large corporations don't cost taxpayers anything. In fact these private companies, financed by stockholders, pay billions of dollars in taxes, according to Daue.

Now here's some history of these organizations. Born in 1938, Fannie Mae began as a government agency at the end of the Depression to bolster the housing industry by buying up FHA-insured loans. Thirty years later, Fannie Mae went private and expanded its role, allowing it to buy conventional mortgages. In the past 29 years, the company says it has provided more than $2 trillion in housing finance for more than 28 million home buyers.

Freddie Mac was born in 1970 as a stockholder-owned corporation chartered to provide a continuous and low-cost source of funding for residential mortgages.

While both Fannie Mae and Freddie Mac have the same charters, Congressional mandate and regulatory structure, they have different business strategies. Like corporate siblings, the two compete against each other in buying home loans, insuring that capitalism thrives in the secondary mortgage market.

Though originally Fannie Mae dealt mostly with mortgage bankers and Freddie was doing business with savings and loans, today there's little difference between the two, explains Daue. "Other than we're bigger," she proudly adds. Fannie Mae says it buys 1 in 5 loans, while Freddie Mac lays claim to 1 in 6.

-- Posted: Aug. 2, 2000