Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac play a central role in mortgage lending in the U.S.  

These government-sponsored enterprises have been the foundation of the U.S. housing market for decades, securitizing individual mortgage loans into bonds, providing capital to lenders, and encouraging credit extension to generations of prospective homeowners. 

In this article, we’ll explore the stability Fannie Mae and Freddie Mac bring to residential mortgage financing and the historical context of their conservatorship post-2008 financial crisis. We’ll discuss their operations, government ties, and financial impacts, in addition to the criteria that govern loan eligibility for mortgages backed by these corporations. 

Fannie Mae and Freddie Mac Overview 

What are Fannie Mae and Freddie Mac? 

Fannie Mae and Freddie Mac are nicknames for the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), respectively. In brief, Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that play a pivotal role in the secondary mortgage market by guaranteeing most U.S. mortgages. 

The Federal Housing Finance Agency, which regulates both GSEs, describes their role as generating “liquidity, stability, and affordability to the mortgage market.” Fannie Mae and Freddie Mac are able to fulfill this role by guaranteeing about 70% of U.S. mortgage loans, which are bought and placed on the bond market as mortgage-backed securities. By buying mortgages, Fannie Mae and Freddie Mac reduce risk for both the lenders and mortgage companies who offer loans and the secondary mortgage market investors who purchase them. Lenders use the capital from mortgage sales to create and offer more loans. As a result, affordable housing and homeownership is accessible to more people, who now have access to long-term loans like 30-year fixed-rate mortgages. 

Conventional loans guaranteed by Fannie Mae and Freddie Mac are the most common type of mortgage in the U.S. 

A Brief History 

As GSEs, both Fannie Mae and Freddie Mac were created by Congress. 

Fannie Mae was chartered by the U.S. government in 1939 as a response to the Great Depression. As the foreclosure rate rose and homeownership became near impossible for most people, banks failed, and a national housing crisis soon followed. The government decided to revitalize the mortgage market by passing the National Housing Act, which established Fannie Mae. Fannie Mae would supply housing funds by buying mortgages from lenders on the secondary mortgage market (originally FHA loans, but later expanded to include VA loans and then conventional mortgages). Fannie Mae also introduced the long-term, fixed rate mortgage with the option to refinance at any time, now a staple mortgage that most Americans use to buy their first homes. 

Freddie Mac was created a few decades later in 1970 under the Emergency Home Finance Act. Freddie Mac was established as a shareholder-owned company for the purpose of expanding the secondary mortgage market. In contrast to Fannie Mae, Freddie Mac primarily buys loans from smaller banks or credit unions to support middle-income homeownership for Americans. 

Purpose and Roles 

Today, Fannie Mae and Freddie Mac serve the following purposes, among others: 

• Provide capital and financing to lenders to encourage credit extension to more homebuyers 
• Stabilize the secondary residential mortgage market 
• Increase the liquidity of mortgage investments by allowing access to mortgage credit 
• In the case of Fannie Mae, liquidate federally owned mortgage portfolios to reduce both adverse market outcomes and federal losses 
• Make homeownership accessible and affordable to more Americans 

Governance and Regulation 

Fannie Mae and Freddie Mac are private shareholder-owned corporations. However, since they are government-sponsored, they are governed and regulated by the Federal Housing Finance Agency (FHFA), which enforces the guidelines laid out in their charters and monitors their investment portfolios. The HUD also oversees both corporations. In 2008, both corporations were placed under federal conservatorship to mitigate the effects of the financial crisis. 

As a result, Fannie Mae and Freddie Mac’s operations have many ties to the federal government. For example, five of the organization’s board of directors are appointed by the President. Additionally, their securities are “government securities” under the Securities Exchange Act of 1934, and both corporations are exempt from state and local tax (other than real property tax). 

To read more about how these two corporations are regulated, you can view the government acts that established them: The Federal Nation Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Act. 

Differences Between Fannie Mae and Freddie Mac 

Although Fannie Mae and Freddie Mac have similar purposes and operations, there are a few differences between them. Here are a few of them: 

How Do Fannie Mae and Freddie Mac Affect Homeowners? 

Fannie Mae and Freddie Mac affect homeowners by guaranteeing most conventional U.S. mortgages, reducing risk for lenders and investors, and thereby making mortgages more affordable for borrowers and would-be homeowners. These corporations are responsible for the availability of 30-year fixed-rate loans in the U.S., which make up 70% of the marketshare. Lenders benefit from reduced risk, which encourages more lending, while investors find mortgages more attractive due to the guaranteed nature of these loans. 

Fannie Mae and Freddie Mac’s presence in the market helps stabilize it and provides necessary liquidity. Their specific criteria and eligibility standards ensure that loans meeting their requirements receive guarantees, further supporting the mortgage market’s health. Many Americans would not be able to become homeowners without Fannie Mae and Freddie Mac. 

The Role of Fannie Mae and Freddie Mac in Financial Crisis 

Fannie Mae and Freddie Mac have played critical roles in recent financial crises, including the 2008 financial crisis and the COVID-19 pandemic. 

2008 Financial Crisis 

Fannie Mae and Freddie Mac’s role in the 2008 financial crisis is complex, and thus we won’t discuss it in full here. In short, 2008 saw the government taking action to reinforce the U.S. economy and housing market by assuming conservatorship of Fannie Mae and Freddie Mac. 

Hoping to stabilize the market and restore Fannie Mae and Freddie Mac to a “sound and solvent condition,” the government intervened to place both enterprises in conservatorships, where they remain today. Signed into law by President George W. Bush in July of 2008, The Housing and Economic Recovery Act of 2008 (HERA) allowed the FHFA the authority to place Fannie Mae and Freddie Mac in conservatorship. 

As conservator, the FHFA manages the corporations and their respective boards of directors. The Agency and directors regularly consult to ensure that the operations and decisions of each enterprise are approved. Additionally, the enterprises are supported financially by the U.S. Department of the Treasury to ensure that each remains solvent and can continue to fulfill their role as stabilizers of the mortgage market. 

COVID-19 Pandemic 

During the COVID-19 pandemic, job losses and other factors led many homeowners to struggle to pay their housing costs. In response, the government passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. 

The CARES Act provided many benefits to Americans during the pandemic, including economic assistance in the form of stimulus checks, eviction/foreclosure moratoriums, and mortgage relief for those with mortgages backed by Fannie Mae or Freddie Mac. This led to greater flexibility and fewer losses for individual homeowners impacted by the pandemic. 

Loan Eligibility 

If you’re seeking a conventional loan backed by Fannie Mae or Freddie Mac, you must meet specific eligibility criteria for approval. There’s a reason why so many Americans have mortgages backed by these two corporations: Fannie Mae and Freddie Mac-backed loans offer relatively accessible terms ensuring loan quality and guaranteeing them to make lenders more comfortable taking on risk in lending to you. 

Fannie Mae and Freddie Mac have their own individual requirements for loan eligibility, as will your lender. In general, however, borrowers will need low debt, a minimum credit score around 620-660, and an acceptable down payment. They will also need to meet the conforming loan limit value for the year. 

Below are a few of the differences between loan eligibility requirements for Fannie Mae and Freddie Mac as of 2024. 

Conclusion 

Fannie Mae and Freddie Mac play pivotal roles in the U.S. housing market, facilitating access to affordable mortgages for millions of Americans. Their significance extends beyond homeownership, profoundly impacting real estate investors as well. Understanding the intricacies of how these entities operate is paramount for anyone navigating the dynamic landscape of mortgage financing.