Understanding Fannie Mae & Freddie Mac in the Mortgage Market

photo by wallstreetmojo

As we all navigate this new normal of higher interest rates, we have more and more buyers doing their research and asking more questions. We always send mortgage related questions to our favorite local lenders, but let’s use this realtor.com article to help explain one question we get a lot – What is Fannie Mae & Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises responsible for helping thousands of people get a home mortgage. Fannie Mae stands for the Federal National Mortgage Association, or FNMA. Over the years, the acronym gave birth to the common name. FN = Fannie, MA = Mae. Before the establishment of Fannie Mae in 1938, most loans that were provided to homebuyers were short-term with a balloon payment due at the very end. With these short-term (usually only 5 or 7 year loans), many borrowers weren’t ready for the big payment due at the end. The Great Depression hit. Many people lost their jobs and their entire life savings. Enter Fannie Mae.

As part of the New Deal, the Federal government created Fannie Mae to stimulate the housing market by making mortgages more accessible to lower-income borrowers. Fannie also made it easier for banks and lenders to issue loans and many of the FHA-backed loans issued in the 1930’s and 1940’s were purchased by Fannie Mae.

Borrowers do not go to Fannie Mae directly, though. Your lender is the go-between and works directly with Fannie Mae representatives. Fannie Mae reduces the risk for banks and guarantees a lender won’t lose money if a borrower defaults. Which means banks are more willing to lend money to prospective homebuyers, keeping the economy humming. (Think of them as an invisible co-signer on your home mortgage.)

Now, what is Freddie Mac? Freddie Mac, also known as the Federal Home Loan Mortgage Corporation, is Fannie Mae’s brother organization. It was founded in 1970 to compete with Fannie Mae and purchase mortgages issued by banks to homeowners. There’s no appreciable difference in the philosophy of the two companies, and Freddie was established to avoid Fannie having a complete monopoly over the mortgage market.

How Fannie and Freddie Help Homeowners:

-They purchase other lenders’ loans on the secondary market, package them into mortgage-backed securities and sell them to investors, such as hedge funds.

- By buying up banks’ loans, Fannie and Freddie essentially flood these lenders with cash, which they can then turn around and lend to even MORE  home buyers. 

-With more cash with lenders, this helps more buyers get homes who might not qualify otherwise.

-Check out their website to give more tips on homebuying savings.

-Take a course on First-Time Home Buying