Fannie Mae and Freddie Mac are two of the federal government’s most famous children. They play an essential role in the mortgage market, and if you’re looking to get a mortgage, you’ll probably have heard these names come up a few times.
Our guide explains Fannie Mae vs. Freddie Mac, how they’re related, and why you need to know what these bodies are if you’re about to buy a home.
What is Fannie Mae?
Fannie Mae is shorthand for the Federal National Mortgage Association. It was created in 1938 as a direct response to the Great Depression. At the time, many Americans found that buying a house was impossible – lenders simply couldn’t offer them good terms on their loans because the risk was too high.
To explain, being a successful lender (e.g., a bank) is only possible if the sum of money you’re lending doesn’t put your business at risk if you don’t get it back in time. Mortgage-seekers at the time were plagued by an unstable job market, which made lenders wary of handing out money. They couldn’t justify the risk of non-repayment compared to the capital they held in reserve.
Fannie Mae was created by the federal government as a GSE (Government-Sponsored Enterprise) to buy FHA (Federal Housing Administration) mortgages from lenders. This gave the lenders more capital to mitigate risk. Fannie Mae was a profitable enterprise for the government because it could either:
- Hold onto the loans and accumulate interest on their value, or
- Repackage and resell the loans to private investors – this became more common later on.
The body enabled lenders to offer mortgages to home-buyers with better terms, providing much-needed liquidity in the U.S. housing market.
What is Freddie Mac?
Freddie Mac was created in 1970 as the Federal Home Loan Mortgage Corporation. Its purpose was similar to Fannie Mae, but its focus was on the “repackage and sell” idea. The secondary mortgage market consists of mortgages private investors buy via a mediator like Freddie Mac.
Freddie Mac started buying up 30-year mortgages from lenders and wasn’t limited to FHA mortgages like its sister organization. As a competitor of sorts to Fannie Mae, it made selling mortgages more profitable for lenders, once again freeing up capital so that they could make loans to home-buyers.
Fannie Mae vs. Freddie Mac: How Are They Similar?
Today, Fannie Mae and Freddie Mac are somewhat similar enterprises. Although they were created independently and for different reasons, their history has followed a distinct pattern.
They were both created as GSEs. The federal government initially owned both bodies. They were designed to shore up capital for lenders and increase homeownership, thus building liquidity in the U.S. housing market.
- They both have terms for lenders. Both organizations can dictate the terms on which they’ll buy mortgages from lenders. This influences the types of loans that lenders will offer home-buyers.
- They were both privatized. Fannie Mae became a private company in 1968, 2 years before Freddie Mac came onto the scene. Freddie Mac was eventually also privatized in 1989.
- They both played a role in the 00s housing crisis. The housing bubble that developed in the 90s and 00s was due to huge overconfidence on the part of lenders, GSEs, the federal government, and secondary buyers. High-value mortgages were given out by lenders and approved by Fannie Mae and Freddie Mac, even though the repayment terms were impossible. This eventually led to a massive number of defaults and a massive loss for lenders, GSEs, and everyone else.
- They were bailed out and are more closely regulated by the government now. The government stepped in to ensure that the GSEs didn’t go bust, but they’re now both overseen by the FHFA (Federal Home Financing Agency).
Fannie Mae vs. Freddie Mac: How Are They Different?
Since the housing crisis in the late 00s, the main difference has been that Freddie Mac buys loans from smaller lenders, while Fannie Mae tends to purchase mortgages from larger entities like banks.
They provide separate underwriting services to lenders – these are used to determine who is eligible for a loan. The GSEs also offer programs to support those who might struggle to buy a house otherwise, e.g. Freddie Mac’s Home Possible program or Fannie Mae’s HomeReady mortgage.
Why Understanding Fannie Mae vs. Freddie Mac Matters for Potential Home Buyers
Finding the right lender is essential for homebuyers. Equally, you need to know who is backing your lender – is it Fannie Mae or Freddie Mac? This will influence the terms your lender is likely to offer you, and whether you might be eligible for support through the GSEs.
They underwrite different types of mortgages. For example, if you’re looking for a loan with a smaller down payment, you’ll probably need a Freddie Mac-backed lender. The GSEs don’t “control” lenders, but they have considerable sway over who can be offered a mortgage.
How to Get a Mortgage: Fannie Mae vs. Freddie Mac Guide for Buyers
If you’re planning to get a mortgage, here’s how to prepare:
- Find a lender that suits you. What types of loans do they offer? Can you afford their down payment? Are they responsive? Research your lender thoroughly.
- Find out what help you can access via the GSE. Speak to your lender about help-to-buy options that might be available through Fannie Mae or Freddie Mac.
- Be confident that you can make repayments. The 00s housing market crisis was partly caused by mortgages being handed out that could never be repaid. Take a mortgage that you’re confident you can repay regularly – don’t be a hero!
- Apply for a loan. Once you understand the GSE backing your lender and what terms you can get, it’s time to apply for your mortgage.
Now that you know about Fannie Mae vs. Freddie Mac, you have a broader understanding of the housing market and whether you should take out a mortgage.
Want to find which GSE suits you best? Contact the team at Associates Home Loan today to learn more.