The Balance
Fannie Mae Versus Freddie Mac, Their Similarities and Differences
  • Investing
    • Basics
    • Stocks
    • Real Estate
    • Value Investing
    • View All
  • Credit & Debt
    • Building Credit
    • Credit Card Basics
    • Reducing Debt
    • Reports & Scores
    • View All
  • Retirement Planning
    • Basics
    • 401(k) Plans
    • IRAs
    • Social Security
    • View All
  • Banking & Loans
    • Basics
    • Best Savings Account Rates
    • Getting a Loan
    • Online Banking
    • View All
visit our other sites
Hot Topics
  • Subprime Crisis
  • Financial Crisis
  • Obamacare
    Hot Topics Subprime Crisis

    Fannie Mae Versus Freddie Mac, Their Similarities and Differences

    What's the Difference Between Fannie Mae and Freddie Mac?

    • Share
    • Flip
    • Pin
    • Email
    By Kimberly Amadeo
    Updated June 21, 2018

    Fannie Mae and Freddie Mac are two entities established by the government to boost the housing market. These organizations are not only different in their genesis, but also in their target market and products. For example, Fannie Mae buys mortgages from large retail banks while Freddie Mac buys them from smaller thrift ones. 

    The Roosevelt administration established Fannie Mae in 1938 as a government agency. It bought Federal Housing Administration mortgages and included them in its books. In 1968, it became a Government-Sponsored Enterprise. This meant that whereas the stockholders owned it, the U.S. government guaranteed its loans. That turned out to be quite a dangerous arrangement.

    In 1970, the Nixon administration established Freddie Mac as a GSE, which meant it could buy any type of mortgage and not just FHA ones. Unlike Fannie Mae, Freddie Mac did not have a government guarantee for its loans. It wanted to transfer the risk of default. It did this by putting together similar types of loans into mortgage-backed securities. It then sold these securities to hedge funds, pension funds, and individual investors. 

    Congress established Freddie Mac to compete with Fannie Mae and allowed it to buy non-FHA mortgages and translate them into MBS. 

  • 01
    Fannie Mae Is the Federal National Mortgage Association

    female-builder.jpg
    Fannie Mae greatly expanded the housing market. (Photo: Getty Images)

    In 1938, Congress established Fannie Mae through the Federal Home Loan Bank Act. It purchased mortgages insured by the FHA. President Roosevelt wanted Fannie Mae to help realize the American Dream of homeownership. When Fannie Mae bought the loans from banks, it gave them more money to lend.

    Congress transformed Fannie Mae into a company in 1968. Instead of using tax dollars to fund it, the government allowed Fannie to sell stocks to shareholders in an initial public offering. Congress needed the funding to finance the Vietnam War. 

     

  • 02
    Freddie Mac Is the Federal Home Loan Mortgage Corporation

    homebuilder.jpg
    Fannie and Freddie expanded the housing market. (Photo:Justin Sullivan/Getty Images)

    Like Fannie, Freddie Mac is a government-owned corporation that buys mortgages and packages them into mortgage-backed securities.Freddie Mac focused on encouraging banks to create 30-year mortgages to avoid keeping the loans in their books for thirty years. That tied up too much money and was risky for the banks.

  • 03
    Fannie Mae and Freddie Mac Similarities: They Make Mortgages Possible

    couple-of-homeowners-at-computer.jpg
    Photo: Dave and Les Jacobs/Getty Images

    Fannie Mae, Freddie Mac, and the FHLB made housing affordable for most Americans for decades. But they functioned as government-sponsored entities. This meant they had to be profitable for the shareholders while creating the secondary market that made the resale of mortgages feasible.

    According to the Office of Federal Housing Enterprise Oversight, Fannie Mae, Freddie Mac, and FHLB provided 90 percent of the financing for new mortgages by the end of 2007. This was more than double their share of the mortgage market revealing the extent to which private mortgage financing had dried up.

    In early 2008, Fannie Mae and Freddie Mac stepped in to guarantee more subprime mortgages to reassure the housing market. As the subprime mortgage meltdown continued, the Federal government had to intervene to rescue Fannie Mae and Freddie Mac themselves.

    Once the banks panicked, the two GSEs were the only ones making loans. After the recession, most banks would not give anyone a loan without Fannie Mae and Freddie Mac guarantees. 

    Both Fannie and Freddie are under the conservatorship of the Federal Housing Finance Agency. The U.S. Department of the Treasury owns all their senior preferred stock. That means all of their profits go to the U.S. Treasury. Investors can still buy common stock and junior preferred stock. The conservatorship doesn't allow them to pay dividends.

  • 04
    Their Differences

    Fannie and Freddie buy their mortgages from different sources. Fannie buys them from large commercial banks. Freddie buys them from smaller banks.

    They also offer different programs for those who can only make low down payments. Fannie Mae offers the Home Ready loan. Applicants can't earn more than 80 percent of the area's median income. Freddie offers the Home Possible program. It requires that applicants live in the home and no more than the area's average income.

    Fannie and Freddie origins and original purposes were also different. Fannie was created in 1938 to allow banks to create more mortgages. It bought the loans from banks, but then was more likely to keep them on its books. Freddie was created in 1970 as competition for Fannie. It also was the first to resell loan packages on the secondary market .

  • 05
    Their Role in the Mortgage Crisis

    house underwater
    Photo: John Lund/Getty Images

    In August 2007, the Economist warned that Fannie's and Freddie's ability to pump liquidity in the market could be compromised. Fannie announced it would withdraw a debt offering. At that time, everyone thought that Fannie had enough cash to enable it to wait until the market improved. But in November 2007, Fannie declared a $1.4 billion quarterly loss and announced it would seek $500 million in new funds. Freddie then disclosed a $2 billion loss, sending its stock price down 23 percent.

    Freddie held $120.8 billion in subprime mortgages. Experts believed it was too small a percentage of its overall portfolio to threaten the agency's viability. By Q4 2007, Freddie reported a $2 billion loss. In response, the agency raised $6 billion in new capital through the sale of preferred stock to shore up its reserves. It wasn't enough.

  • 06
    But They Didn't Cause the Mortgage Crisis

    fannie and freddie
    Photo: Sean Martin/Getty Images

    Fannie Mae and Freddie Mac did not cause the subprime mortgage crisis. Their portfolios held a lower percentage of subprime loans than that of commercial and investment banks. Nonetheless, they did increase their acquisition of these loans to keep their shareholders happy in what had become a very competitive marketplace.

    Before the financial crisis, they owned or guaranteed $1.4 trillion, or 40 percent, of all U.S. mortgages. Of that, only $168 billion was in subprime mortgages.

  • 07
    They're Now Owned by the Government: What It Means

    House Auction
    Photo: David McNew/Getty Images

    The government spent at least $150 billion to keep Fannie Mae and Freddie Mac mortgage companies functioning. It has been managing the two since September 2008, when the Federal Housing Finance Agency put them into receivership. This was supposed to be a temporary arrangement, but Congress has not taken action to change Fannie's and Freddie's status.

  • The Future for Fannie and Freddie

    Now that Fannie and Freddie are publicly-owned, they should stay that way, at least for the time being. Suggestions to privatize them again, or eliminate them and let the private sector take over, won't work. Why? The government has already tried to privatize the mortgage market, and all efforts have consistently failed.
  • Fannie Mae and Freddie Mac Bailout

    What Was the Fannie Mae and Freddie Mac Bailout?

  • home builders

    How Freddie Mac Affects You

  • fannie and freddie

    Did Fannie and Freddie Cause the Mortgage Crisis?

  • California community hit hard by foreclosure epidemic

    Subprime Mortgage Crisis and Its Aftermath

  • Fannie Mae supports homebuilding.

    2 Critical Ways Fannie Mae Helps You

  • Paulson and Bernanke

    What Did the Bank Bailout Bill Really Do?

  • couple-shakes-hand.jpg

    How the Government Mortgage Bailout Affected You

  • stock market crash 2008

    37 Critical Events of the 2008 Financial Crisis

  • couple paying bills

    How Hedge Funds Created a Financial Crisis for Millions

  • President George W. Bush

    Why Bush's 2008 Rebate Checks Didn't Work

  • tranches

    Tranches Created Both the Housing Boom and Financial Crisis

  • Henry Paulson

    How Hank Paulson Saved You from the Financial Crisis

  • Man Looking at Line Chart in Shape of Houses Making a Turnaround

    What Caused the Subprime Mortgage Crisis?

  • What Caused the 2008 Financial Crisis and Could It Happen Again?

  • Bernanke, Bush, Paulson didn't avoid the financial crisis

    Could the Financial Crisis Have Been Avoided?

  • Too big to fail

    What Is Too Big to Fail?

Our Best Money Tips, Delivered
You're in! Thanks for signing up.
There was an error. Please try again.
Facebook Pinterest Twitter Flipboard Linkedin
  • Investing
  • Credit & Debt
  • Retirement Planning
  • Banking & Loans
  • About Us
  • Advertise
  • Terms of Use
  • Privacy Policy
  • Cookie Policy
  • Careers
  • Contact
  • Editorial Guidelines
Also from The Balance Team
The Balance Small Business
The Balance Careers
The Balance is part of the Dotdash publishing family.
  • Lifewire
  • ThoughtCo
  • TripSavvy
  • The Spruce
  • and more