Sorry Hornton, not a "who" but rather a "what".
And these 'whats' are nearly a century-old and play a vital role in the nation's housing finance system. In order to know Fannie Mae and Freddie Mac on a first-name basis, you ought to gain a basic understanding of what they are, how they differ, and how they impact you as a homeowner and real estate investor.
The Story Behind the Names
Loving grandparents or U.S. mortgage finance giants?
Though better known by their nicknames, Fannie Mae and Freddie Mac have more official titles. Fannie Mae came from the acronym pronunciation of FNMA for the Federal National Mortgage Association, and Freddie Mac from the Federal Home Loan Mortgage Corporation, FHLMC. It is unknown why the letters "HL" were left out... rumors have it that they were completely ditched in 1997 when the company dropped the acronym altogether.
Similarities
Twin corps with twin functions and twin histories. Let's check out what those look like.
Functions
Fannie Mae and Freddie Mac were created by Congress to provide liquidity, stability, and affordability in the United States' mortgage market. Especially during times when financial stress and turmoil threaten the economy. For example, a pandemic.
How it works: The twin corps buy mortgages from lenders to hold or package into mortgage-backed securities (MBS) that may be sold to investors in the secondary mortgage market.
How everyone can benefit: Lenders are able to use the capital from selling mortgages to Fannie Mae and Freddie Mac to originate more loans and engage in further lending. Borrowers are able to have a continuous, stable supply of mortgage money and lower interest rates.
Histories
Like a Phoenix, Fannie Mae was born from the ashes of our 1930s' economy. Otherwise known as The Great Depression. When one in four homeowners lost their homes to foreclosure and the banks did not have any money to lend, the Federal National Mortgage Association (Fannie Mae) entered the chat. To combat the lack of affordable housing during this time, the 1938 initiative introduced a new type of mortgage to the market: the long-term, fix-rate loan with the option to refinance at any time. Up until 1970, it was the primary buyer and seller of federally backed mortgages in the country.
Then, the Federal Mortgage Corporation (Freddie Mac) entered the chat.
In order to compete with the recent privatized, shareholder-owned Fannie Mae (1968), Congress created Freddie Mac to expand the secondary mortgage market and reduce interest rate risk for banks. Eventually Freddie Mac joined its counterpart in becoming shareholder-owned in 1989.
By playing a key role in the mortgage markets, both Fannie Mae and Freddie Mac have experience causing and responding to recent national crises. They've been put to the test since their beginnings, with the housing market crash of 2008, and the unfolding COVID-19 Pandemic. They were able to help steer the housing market toward recovery and offer mortgage relief and protections to homeowners, including forbearance and loan modification programs.
Differences
We said fraternal twin corps, right?
Though similar in general purpose and previous history, there is a lot to differ between the two.
Mortgage Sourcing
The main difference between Fannie Mae and Freddie Mac is where they source their mortgages from. Fannie Mae buys from larger, commercial lenders and banks, whereas Freddie Mac buys from much smaller banks.
Intended Purpose
As mentioned earlier, Fannie Mae was created first to provide affordable housing and accessible funding following The Great Depression. Freddie Mac's intended purpose was to broaden the secondary mortgage market and reduce interest rate risk for banks.
Approval Guidelines
Following the 1970 approval for Fannie Mae and creation of Freddie Mac, all loans backed by the two are typically conventional or conforming loans (loans offered through a private lender — *cough, Flagship Bank, *cough). Because lending is through a private enterprise, financial assessment and mortgage approval depend on each company's individual guidelines on credit score, debt levels, and income history. While rare, it is possible to be approved for a loan by one institution and rejected by another.
Loan Programs
The difference in offered loan programs for Fannie Mae and Freddie Mac can be summed up as: Fannie's HomeReady loan requires that applicants cannot make more than 80% of the area's median income, and Freddie's Home Possible loan requires that applicants cannot make more than the area's average income and must have a higher credit score to qualify.
Who Regulates?
Though stake-holder owned and privately funded, the two corps have government-sponsored enterprise (GSE) status and are therefore under the direct supervision of the federal government.
Here is what you need to know about the current Fannie Mae and Freddie Mac regulators:
- The president of the United States appoints five of the 18 members of the organizations' boards of directors.
- The secretary of the Treasury is authorized to buy up to $2.25 billion of securities from each company to support its liquidity.
- Both companies are exempt from state and local taxes.
- Both companies are regulated by the Department of Housing and Urban Development (HUD), which is responsible for their general housing missions.
- Both companies are regulated by the Federal Housing Finance Agency (FHFA), which monitors, enforces, and limits Fannie and Freddie's capital standards and size of their mortgage investment portfolios.
Only time will tell if these two beings are truly too big to fail. Until then, understanding Fannie Mae and Freddie Mac is crucial to your understanding of the mortgage process and success in the real estate market. Talk with one of our experienced lenders about their importance and download our Investment Real Estate Guide today.
