In 1938, Congress established Fannie Mae through the Federal Home Loan Bank Act. This resulted in a secondary market for 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, it sold stocks to shareholders in an Initial Public Offering . Besides, Congress needed the funding to finance the Vietnam War.
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.
03Fannie Mae and Freddie Mac Similarities: They Make Mortgages Possible
Fannie Mae, Freddie Mac and the FHLB made housing affordable for most Americans for decades. However, 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.
By the end of 2007, Fannie Mae, Freddie Mac and FHLB provided 90 percent of the financing for new mortgages, according to the Office of Federal Housing Enterprise Oversight. 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. (Source: “Fannie and Freddie Drive Home Loans,” FT.com, April 2, 2008.)
04Their Role in the Mortgage Crisis
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.
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 United Stated mortgages. Of that, only $168 billion was in subprime mortgages,
The government spent at least $150 billion to keep Fannie Mae and Freddie Mac mortgage companies functioning. It has been managing the two GSEs since September 2008, when the Federal Housing Finance Agency put them into receivership. This was a temporary arrangement, but housing conditions have never improved enough to release the government of this responsibility.
Fannie Mae vs. Freddie Mac: Similarities and Differences
What's the Difference Between Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are two companies 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. Taking an example, Fannie Mae buys mortgages from retail banks while Freddie Mac buys them from smaller thrift ones. (Source: "Fannie Mae vs. Freddie Mac," Diffen.com.)
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 and 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.