What Are Fannie Mae And Freddie Mac?

What are Fannie Mae and Freddie Mac?

When we say "Fannie Mae" and "Freddie Mac," we're referring to enterprises that supply funds to banks and mortgage companies that provide housing loans.

Fannie Mae and Freddie Mac are the two government-sponsored enterprises with significant roles in the U.S. mortgage market – they add stability to mortgage lenders by repackaging mortgages into mortgage-backed securities on the secondary mortgage market. If you have a mortgage, there's a good chance it has been sold on the secondary market to one of them.

Let's discuss Freddie Mac and Fannie Mae, their differences and similarities, and how they change the home buying process.

What Is Fannie Mae?

The Federal National Mortgage Association (Fannie Mae) provides liquidity to mortgage lenders by purchasing mortgages from lenders. It repackages mortgages into mortgage-backed securities for sale to investors on the secondary mortgage market.

Fannie Mae pools funds available for housing by attracting new secondary market investors through offering mortgage-backed securities, guaranteeing the timely principal and interest payment on the underlying mortgages.

Congress created Fannie Mae in 1938 to provide local banks with money to finance home loans. It helped create more homeowners and affordable housing after the Great Depression and introduced the long-term, fixed-rate loan.

What Is Freddie Mac?

The Federal Home Loan Mortgage Corporation (Freddie Mac), like Fannie Mae, buys mortgages from lenders and either holds them in portfolios or packages them into mortgage-backed securities (MBS) to sell.

Freddie Mac is also a mortgage investor. It increases availability for mortgages and mortgage-backed securities, reducing interest rate risk for smaller banks and mortgage lenders.

Freddie Mac came about through the U.S. government as a private company to ensure a regular, affordable supply of mortgage funds. In 1989, it became a shareholder-owned company. Today, Freddie Mac operates under a congressional charter.

What’s The Difference Between Fannie Mae And Freddie Mac?

The secondary home loan market helps the mortgage industry thrive, and Fannie Mae and Freddie Mac spearhead this initiative. Even though they do similar things, there are several differences.

Key Difference #1: Institutional Purpose

We already know that Fannie Mae and Freddie Mac were created as secondary mortgage markets to "lubricate" the housing market by encouraging banks to offer more home loans. But Fannie Mae's institutional purpose is different from Freddie Mac's:

• Fannie Mae: Fannie Mae was originally created to provide accessible funding and affordable housing during and immediately after the Great Depression.
• Freddie Mac: Freddie Mac was created as a public enterprise to expand the secondary mortgage market. In short, Freddie Mac was born out of a need to expand on Fannie Mae's already-created mold.

Key Difference #2: Mortgages They Buy

Fannie Mae and Freddie Mac serve different areas of the housing market. Let's take a quick look at each in terms of the type of mortgages they buy:

• Fannie Mae: Fannie Mae focuses on purchasing mortgages from larger commercial banks and lenders to prompt liquidity in the housing market and keeps lending going.
• Freddie Mac: On the other hand, Freddie Mac targets smaller banks or credit unions, such as thrift banks, in the secondary mortgage market.

Ultimately, it's important to remember that purchases made by each enterprise ensure that home buyers and investors keep a stable supply of mortgage money. If banks could not sell them to Fannie Mae and Freddie Mac, they couldn't continue to write loans.

Key Difference #3: Available Loan Programs

The two enterprises offer different programs for different types of home buyers and can even lessen risks to banks by lending money to riskier borrowers. Freddie Mac offers programs that assist a range of home buyers, including potential home buyers who:

• Have moderate-to-low incomes
• Seek flexible down payments
• Want to refinance a mortgage

Fannie Mae also offers programs that support the housing market and kick-start homeownership for potential homeowners, such as first-time home buyers. They might also help with the following for individuals:

• Down payment options
• Competitive mortgage rates
• Refinancing opportunities

Here are a few loan programs you can take advantage of:

• Fannie Mae HomeReady: The Fannie Mae HomeReady mortgage came about to provide an alternative to the Federal Housing Administration (FHA) loan. The HomeReady mortgage helps prospective low-income homeowners save on the cost of buying a house. They offer low down payment options, borrower credits and the ability to pay less on closing costs.
• Fannie Mae HomeStyle: A HomeStyle Renovation mortgage offers funds for renovation projects, from repairs to landscaping updates. You can use this type of loan to buy and renovate most properties.
• Freddie Mac Home Possible: Home Possible loans offer low-income borrowers a financing option with similar options to the HomeReady program, with cancellable mortgage insurance, less stringent credit scores, a lower debt-to-income ratio (DTI) and lower loan-to-value (LTV) requirements. DTI refers to the amount of debt you have relative to your income; LTV measures the loan amount you need against the home's appraised value.
• Freddie Mac HomeOne: The Freddie Mac HomeOne program offers first-time home buyers flexibility and low down payment options for a primary residence.

Check out the bare-bones factors in the types of programs available:

Fannie Mae And Freddie Mac FAQs

Let's take a look at some commonly asked questions so you get all your questions answered.

Why do lenders sell mortgages to Freddie Mac?

Lenders sell mortgages to Freddie Mac because it allows lenders to lend money to new home buyers and take the debt from lenders' balance sheets. This frees up credit for new customers. Lenders can also make a quicker profit, as they get funds right away, instead of waiting for homeowners to take 30 years to pay off their loans. The secondary mortgage purchases mortgages and makes money while you pay off your loan.

How do you know if your mortgage can be sold? Check out your loan paperwork – the fine detail will mention whether your home loan can be sold.

Who controls Fannie Mae and Freddie Mac?

The Federal Housing Finance Agency oversees, regulates and houses the overall mission of Fannie Mae and Freddie Mac. The FHFA also oversees the 11 banks of the Federal Home Loan Bank (FHLB) System and the Office of Finance. Ultimately, it takes care of the risks to the U.S. financial systems.

Do all mortgages go through Fannie Mae or Freddie Mac?

Fannie Mae and Freddie Mac support around 70% of the mortgage market, according to the National Association of REALTORS (NAR). In other words, most conventional loans from private lenders end up going to either Freddie Mac and Fannie Mae.

Who qualifies for Fannie Mae or Freddie Mac?

It depends. If you qualify for a conventional loan, you'll need a down payment of at least 3%, credit score of at least 620 and a DTI of around 50%. You'll also have to stay under the conforming loan limit to qualify for a conventional loan. In most areas for a one-unit property, you'll need to purchase a home below $766,550 in most areas, but if you live in a high-cost area, you must stay under $1,149,825.

You can also qualify for another type of loan with lower qualifications, including one of Fannie Mae or Freddie Mac's programs discussed above.

Is an FHA loan Fannie Mae or Freddie Mac?

Fannie Mae and Freddie Mac have nothing to do with Federal Housing Administration (FHA) loans, because FHA loans are backed by the federal government. Fannie Mae and Freddie Mac purchase conventional loans, which have higher requirements than FHA loans.

However, it's worth considering the pros and cons of choosing an FHA loan over one of the loan programs from Fannie Mae or Freddie Mac, such as the Fannie Mae HomeReady program, the Fannie Mae HomeStyle Renovation program, the Freddie Mac Home Possible and the Freddie Mac HomeOne program. They might all have similar requirements, but look at the details of each loan before you choose.

The Bottom Line

Fannie Mae and Freddie Mac purchase mortgages to free up money so they can turn around and lend more money to other borrowers. They may have different institutional purposes, differ in the mortgages they buy and offer different loan programs.

It's important to note that you don't have much control over whether your loan gets sold on the secondary market, and it's also important to know that you won't notice changes in your loan if it gets sold to Fannie Mae or Freddie Mac.