Fannie Mae Versus Freddie Mac, Their Similarities and Differences

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

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

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

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. Congress 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

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

In 1970, President Richard Nixon established Freddie Mac to compete with Fannie Mae. 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. 

Fannie Mae and Freddie Mac Similarities

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 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.

According to the Office of Federal Housing Enterprise Oversight, Fannie Mae, Freddie Mac, and FHLB provided 90% 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. 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 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.

They Played a 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. 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%.

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 the fourth quarter of 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 It

fannie and freddie
Fannie and Freddie made it possible for many more people to afford their own homes. 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%, of all U.S. mortgages. Of that, only $168 billion was in subprime mortgages.


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

On September 7, 2008, 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.

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.