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Key takeaways

  • Fannie Mae and Freddie Mac are government-sponsored enterprises that aim to provide the mortgage market with stability and affordability.
  • They are major players in the secondary mortgage market, buying loans from lenders and either keeping them or repackaging them as mortgage-backed securities.
  • Fannie Mae and Freddie Mac were both created by Congress but have different intended purposes and loan-sourcing methods.

As you explore your mortgage options, you’re likely to come across two names: Fannie Mae and Freddie Mac. Although you won’t directly get a home loan through these government-sponsored enterprises (GSEs) — private entities operating under a Congressional charter — they nonetheless have an impact on your getting a mortgage and its terms. Let’s take a closer look at these key players in the mortgage industry, and what distinguishes them.

What are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises. Congress created both with the goal of adding stability and affordability to the country’s mortgage market. They also provide banks and mortgage companies with ready access to funds on reasonable terms, adding liquidity to the mortgage market.

Both agencies are major players in the secondary mortgage market. That is, their focus is buying loans from mortgage lenders, giving those institutions more capital to continue offering financing to other borrowers. Fannie Mae and Freddie Mac then either keep them or, more often, repackage them as mortgage-backed securities that can be sold to investors.

By acting as a market-maker — that is, constant buyer — they ensure liquidity in the lending world. As of 2023, Fannie Mae and Freddie Mac support around 70 percent of the mortgage market, according to the National Association of Realtors. That means the majority of conventional loans, those offered by private lenders, end up being backed or purchased by one of the two entities.

Though they set criteria for loans, neither Fannie Mae nor Freddie Mac originate or directly provide mortgages to homebuyers. Instead, you’ll get your loan from a mortgage lender, such as a bank, credit union or online lender, which can then choose to sell the loan to one of these GSEs, assuming the loan’s eligible.

Differences between Fannie Mae and Freddie Mac

While they may seem incredibly similar, Fannie Mae and Freddie Mac have some key differences. Here’s a closer look at what differentiates Freddie Mac from Fannie Mae.

Intended purpose

Fannie Mae was established with the intended purpose of creating a more reliable source of accessible funding for banks and mortgage companies. This, in turn, opened the door to more widely accessible and affordable mortgages for Americans seeking to become homeowners. Congress created Freddie Mac, on the other hand, with the goal of expanding the secondary mortgage market, buying loans that meet its standards from lenders. This function allows lenders to make more loans available to prospective buyers.

Loan sourcing

Although both do buy mortgages, each GSE purchases loans from different sources. In general, Fannie Mae tends to buy loans from larger commercial banks and mortgage lenders, whereas Freddie Mac often buys loans from smaller banks.

Lending requirements

Fannie Mae and Freddie Mac also have slightly different requirements for the mortgages they purchase. In both cases, Fannie and Freddie loans must be conforming loans, or adhere to these standards, for them to be eligible for purchase. The requirements cover the amount of the home purchase price that can be financed, the borrower’s credit score and debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and other factors.

Loan programs

Fannie and Freddie each sponsor different loan programs — mortgage products that expand homeownership opportunities to buyers who may not be able to afford a conventional down payment. These include HFA loans offered through state housing finance agencies, as well as the HomeReady and HomePossible mortgage programs, offered through approved private lenders. Both empower buyers by requiring only a 3 percent down payment.

Similarities between Fannie Mae and Freddie Mac

Now that we’ve covered their differences, let’s touch on how Fannie Mae and Freddie Mac are similar.

Their creation and structure

Both Fannie Mae and Freddie Mac were created by Congress to address issues in the housing market. They exist as publicly-traded corporations that are under the conservatorship of the government.

Buy and sell mortgages

Fannie Mae and Freddie Mac buy loans from lenders and repackage them into mortgage-backed securities. This benefits the mortgage market in a couple of ways. First, it lowers the risk of default for lenders since they don’t have to keep these loans on their books. Plus, selling mortgage-backed securities to investors creates stability in the secondary mortgage market, further lowering risk and leading to lower interest for borrowers.

Increase loan availability

Because Fannie and Freddie buy loans from lenders, this increases the amount of money lenders can loan out. Once they close a loan and sell it to Fannie or Freddie, lenders can re-lend that cash.

Standardize loans

Fannie Mae and Freddie Mac only buy loans that conform to the FHFA’s standards. That means they must be under a certain loan limit and borrowers must meet specific financial requirements. Lenders have adopted these standards for most conventional conforming loans so they can sell their mortgages to Fannie and Freddie.

Fannie Mae and Freddie Mac history

In 1938, the government created Fannie Mae, or the Federal National Mortgage Association, amid the struggles of the Great Depression. The goal of Fannie Mae was to create a more reliable source of funding for banks, opening doors for more Americans to become homeowners, figuratively and literally.

Freddie Mac, short for the Federal Home Loan Mortgage Corporation, came on the scene through an act of Congress in 1970, with a similar purpose of ensuring that there are reliable, affordable mortgage funds available nationwide.

Since 2008, both Fannie Mae and Freddie Mac have operated under the conservatorship of the Federal Housing Finance Agency (FHFA). Though both are currently under a conservatorship of the same agency, the two entities are separate from one another, each with its own shareholders and leadership.

Fannie and Freddie in the 21st century

Both Fannie and Freddie played a role in the Great Recession. In the years leading up to the housing market collapse, they backed or owned numerous subprime mortgages. When the housing bubble burst, economic pressures and large losses led to the need for the government to step in and help them with bailouts. The two agencies took on more debt but, as a result of their losses, they risked becoming insolvent, and were put under FHFA conservatorship. They’ve since paid back most of the bailout money.

During the COVID-19 pandemic, Fannie Mae and Freddie Mac offered mortgage relief and protections to homeowners, including forbearance, loan modification programs and a moratorium on foreclosures and evictions.

Who regulates Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are regulated by two government agencies: the FHFA and the U.S. Department of Housing and Urban Development (HUD). Along with HUD and FHFA oversight, the President of the United States appoints five of the 18 board members at each entity. Further details of the regulation for Fannie Mae and Freddie Mac are laid out in two government acts: The Federal Nation Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Corporation Act.

What this means for you

Since you can’t take out a mortgage directly from Fannie Mae or Freddie Mac, why should you care about these big names in the mortgage market? In addition to keeping the mortgage market humming and making homeownership more accessible overall, here’s how they can affect you:

  • They create more affordable financing options, including lower-down payment loan programs.
  • They foster competition among lenders, leading to lower rates.
  • They help set borrowing standards, influencing the qualifications you need to meet to obtain a mortgage.

To find out if you have a Fannie Mae- or Freddie Mac-backed loan: