Fannie Mae vs. Freddie Mac

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

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Fannie Mae and Freddie Mac are two entities established by the government to boost the housing market. Fannie Mae stands for the Federal National Mortgage Association. Freddie Mac is the Federal Home Loan Mortgage Corporation.

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. But both help banks make more loans and keep interest rates low.

Fannie Mae

In 1938, Congress established Fannie Mae through the Federal Home Loan Bank Act. It was a government agency that bought Federal Housing Administration mortgages and included them in its books. President Franklin D. 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. Fannie then packaged the mortgages into mortgage-backed securities. It sold these derivatives to hedge funds, pension funds, and individual investors.

In 1968, Congress transformed Fannie Mae into a company. It wanted to stop funding it as an agency. It needed the money to finance the Vietnam War. Instead of using tax dollars to fund it, the government allowed Fannie to sell stocks to shareholders in an initial public offering. That allowed stockholders to own it. But it was also a Government-Sponsored Enterprise. The U.S. government guaranteed its loans. That turned out to be quite a dangerous arrangement.

Freddie Mac

In 1970, Congress established Freddie Mac. Like Fannie, Freddie was a GSE that bought mortgages. It freed up bank funds so they could make more mortgages. Unlike Fannie Mae, Freddie Mac could buy any type of mortgage and not just FHA ones. It also focused on buying 30-year mortgages from banks. It also sold its mortgages to the secondary market. Fannie held onto its mortgages.

Fannie Mae and Freddie Mac Similarities

Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system 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.

Together, Fannie and Freddie saved the U.S. housing market. By 2009, Fannie Mae, Freddie Mac, and FHLB provided 90% of the financing for new mortgages. That was more than double their share of the mortgage market prior to the 2008 crisis. Private mortgage financing had simply dried up.

After the recession, most banks would not give anyone a loan without Fannie Mae and Freddie Mac guarantees. 

Both Fannie and Freddie are now under the conservatorship of the Federal Housing Finance Agency. The U.S. Treasury Department owns all their senior preferred stock. 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.

Fannie and Freddie 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% 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's 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 to resell loan packages on the secondary market. That helped protect it and its banks from interest rate changes.

They Played a Role in the Mortgage Crisis

By 2007, Fannie and Freddie issued or guaranteed $3.4 trillion in single-family mortgages. This was 40% of the entire mortgage market. Of that, just $300 billion were subprime loans. Experts believed it was too small a percentage of its overall portfolio to threaten the agency's viability. These loans carried higher risk, but they also returned a higher profit. In the highly competitive mortgage market, Fannie and Freddie needed these returns to keep stock prices high.

During the summer of 2007, mortgage-holders began defaulting.

Banks stopped lending, unless Fannie and Freddie guaranteed the loans. In other words, banks shifted the risks to the two GSE's. As a result, Fannie and Freddie sustained huge losses. By the second half of 2007, Fannie and Freddie announced a net loss of $8.7 billion. As a result, their stock prices plummeted and investors grew concerned.

In February 2008, Congress authorized Fannie Mae and Freddie Mac to guarantee more subprime mortgages. That was done to reassure the housing market.

Bailout

As the subprime mortgage meltdown continued, the federal government had to intervene to rescue Fannie Mae and Freddie Mac themselves.

On September 7, 2008, the U.S. Department of the Treasury bailed out Fannie and Freddie. Congress authorized it to purchase up to $100 billion in their preferred stock and mortgage-backed securities. They were put into conservatorship by the Federal Housing Finance Agency. 

Keeping the two afloat cost taxpayers $187 billion over time. Treasury paid $116 billion for Fannie and $71 billion for Freddie. In August 2012, Treasury decided it would send all Fannie and Freddie profits into the general fund. Since then, the bailout has been paid back with $58 billion in profit. Fannie remitted $147 billion and Freddie paid $98 billion.

Frequently Asked Questions (FAQs)

Are there loans that aren't eligible to be sold to Fannie Mae or Freddie Mac?

A mortgage loan that is eligible to be acquired by Fannie Mae or Freddie Mac is called a "conforming" loan. It must meet several standards to fall into that category and qualify to be sold to Fannie or Freddie. Loans that don't meet those standards are nonconforming and can't be sold. Requirements are based around loan amounts, credit scores, debt ratios, down payments, and property locations or types.

What is the loan amount limit for Fannie Mae and Freddie Mac?

The baseline conforming loan limit (CLL) for 2022 is $647,200. In some areas where homes cost more, the CLL is $970,800.

How can I tell whether my mortgage is owned by Freddie Mac or Fannie Mae?

You can contact your mortgage servicer to find out whether one of these entities owns your mortgage. You can also use the lookup tool on the Making Home Affordable website.

Article Sources

  1. Fannie Mae. "About Us."

  2. Federal Housing Finance Agency. "A Brief History of the Housing Government-Sponsored Enterprises," Page 3.

  3. Federal Home Loan Banks. "About Us."

  4. Congressional Budget Office. "Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market," Page ix.

  5. Federal Housing Finance Agency. "History of Fannie Mae and Freddie Mac Conservatorships,"

  6. Fannie Mae. "HomeReady Mortgage Comparison with Fannie Mae Standard,"

  7. Freddie Mac. "Home Possible Mortgage,"

  8. Federal Reserve Bank of New York. "The Rescue of Fannie Mae and Freddie Mac," Page 5.

  9. Federal Reserve Bank of New York. "The Rescue of Fannie Mae and Freddie Mac," Page 6.

  10. Federal Reserve Bank of New York. "The Rescue of Fannie Mae and Freddie Mac," Page 7.

  11. Federal Reserve Bank of New York. "The Rescue of Fannie Mae and Freddie Mac," Page 9.

  12. Henry M. Paulson, Jr. "On the Brink." Page 128. Business Plus, 2010.

  13. Henry M. Paulson, Jr. "On the Brink." Page 170. Business Plus, 2010.

  14. Shadow Open Market Committee. "Valuing the GSE's Government Support," Page 2.

  15. Fannie Mae. "Eligibility Matrix."

  16. Federal Home Financing Agency. "FHFA Announces Conforming Loan Limits for 2022."

  17. Making Home Affordable. "Find Out Who Owns My Mortgage."