You’re likely to come across Fannie Mae or Freddie Mac as you explore your mortgage options. Although you won’t directly obtain a home loan through either, Fannie Mae and Freddie Mac are key players in the mortgage market. Let’s take a closer look at these government-sponsored enterprises, or GSEs.
Fannie Mae and Freddie Mac: Overview
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 homebuyers, opening doors for more Americans, 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. Both Fannie Mae and Freddie Mac now operate under the conservatorship of the Federal Housing Finance Agency (FHFA).
Fannie Mae and Freddie Mac help facilitate access to long-term, fixed-rate mortgages with installment payments. They do this by buying mortgages from banks and other lenders, giving the lenders more capital to continue creating loans for more borrowers. Fannie Mae and Freddie Mac typically package the loans they buy into mortgage-backed securities in the secondary mortgage market.
Both GSEs 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 with bail-out funding. As a result, Fannie Mae and Freddie Mac were able to help usher the housing market toward recovery.
Fast-forward to the COVID-19 pandemic, and Fannie Mae and Freddie Mac have helped offer mortgage relief and protections to homeowners, including forbearance and loan modification programs.
Differences between Fannie Mae and Freddie Mac
Beyond the age difference, what sets Fannie Mae and Freddie Mac apart? Although both buy mortgages, they purchase the loans from different sources. In general, Fannie Mae tends to buy loans from larger commercial banks and lenders, whereas Freddie Mac often buys loans from smaller banks.
In addition, Fannie Mae and Freddie Mac have slightly different requirements of the mortgages they purchase. The mortgage has to be a conforming loan, or adhere to these standards, for it to be eligible for purchase. The requirements cover the amount of the loan, the borrower’s credit score and debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and other factors.
Fannie Mae and Freddie Mac mortgages
Neither Fannie Mae nor Freddie Mac 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. As of 2020, Fannie Mae and Freddie Mac owned 62 percent of conforming loans.
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? The major takeaways are: they create more affordable financing options, including lower-down payment loan programs; they make homeownership more accessible overall; they foster competition in the market, leading to lower rates; and they influence the requirements you might need to meet to obtain a mortgage.
Today, Fannie Mae and Freddie Mac also have a role in times of economic stress. For example, both were able to step in during the pandemic to help ease financial hardship for homeowners.
To find out if you have a Fannie Mae- or Freddie Mac-backed loan: