Fannie Mae vs. Freddie Mac: Similarities, Differences

Fannie Mae and Freddie Mac are two companies now owned by the government to boost the housing market. They are different in their target market, their products, and how they began.

Fannie Mae buys mortgages from retail banks. Freddie Mac buys them from small, thrift banks. (Fannie Mae vs. Freddie Mac)

The Roosevelt Administration created Fannie in 1938 as a government agency. It bought FHA mortgages and kept them on its books. In 1968, it became a government-sponsored enterprise (GSE). That meant it was its stockholders owned it, but the U.S. government guaranteed its loans. That turned out to be a dangerous set-up.

The Nixon Administration created Freddie Mac in 1970 as a GSE. It could buy any mortgages, not just FHA. Since they weren't guaranteed, Freddie wanted to transfer the risk of default. It did this by bundling similar types of loans into mortgage-backed securities (MBS). It sold the securities to investors, like hedge funds, pension funds, and individual investors.

Congress created Freddie to compete with Fannie. It then gave Fannie the right to buy non-FHA loans, and to sell them as MBS.

Fannie Mae Is the Federal National Mortgage Association (FNMA)

Fannie Mae greatly expanded the housing market. (Photo: Getty Images)

In 1938, Congress created Fannie Mae through the Federal Home Loan Bank Act. That established a secondary market for mortgages insured by the Federal Housing Administration (FHA). When Fannie bought the loans from banks, it gave them more money to lend. President Roosevelt wanted Fannie Mae to help realize the American Dream of homeownership.

In 1968, Congress transformed Fannie Mae into a company. Instead of being funded by tax dollars, it sold stocks to shareholders in an Initial Public Offering. Congress needed the funding to finance the Vietnam War. More

Freddie Mac Is the Federal Home Loan Mortgage Corporation (FHLMC)

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

Freddie's focus was to allow banks to create 30-year mortgages. Otherwise, they'd have to keep the loans on their books for thirty years. That tied up too much money, and was risky for the banks. More

Fannie and Freddie Similarities: They Make Mortgages Possible

Interest-only loans made homeownership more affordable. Unfortunately, many people didn't realize they weren't paying off the loan. Photo: Dave and Les Jacobs/Getty Images

Fannie Freddie and FHLB made housing affordable for most Americans for decades. However, they were structured as government-sponsored entities. That meant they had to be profitable for shareholders while creating the secondary market that made resale of mortgages feasible.

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

By the end of 2007, Fannie, Freddie and the Federal Home Loan Banks provided 90% of the financing for new mortgages, according to the Office of Federal Housing Enterprise Oversight. This is more than double their percent of the mortgage market, revealing the extent to which private mortgage financing has dried up.

Once the banks panicked, the two GSEs were the only ones making loans. After the recession, most banks would not give you a loan without Fannie or Freddie guarantees. (Source: FT.com, Fannie and Freddie Drive Home Loans, April 2, 2008)

Their Role in the Mortgage Crisis

house underwater — Many people found themselves underwater when housing prices fell below their mortgage value. 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 b At that time it was thought that Fannie had enough cash to enable it to wait until the market improved. However, by 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%.

Freddie held $120.8 billion in subprime mortgages, too small a percentage of its overall portfolio to threaten the agency's viability -- or so everyone thought. 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.

But They Didn't Cause the Mortgage Crisis

Fannie and Freddie did not cause the subprime mortgage crisis. Their portfolios held a lower percentage of subprime loans than commercial and investment banks. 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%, of all U.S. mortgages. Of that, only $168 billion were in subprime mortgages, More

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

House Auction — Falling housing prices caused the bailout of Fannie and Freddie. Photo: David McNew/Getty Images

The government spent at least $150 billion to keep mortgage companies Fannie Mae and Freddie Mac functioning. The government has been managing the two government-sponsored enterprises (GSEs) since September 2008, when they were put into conservatorship by the Federal Housing Finance Agency (FHFA). It was supposed to be temporary, but housing conditions never improved enough to let the government get out. More

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.