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Fannie Mae and Freddie Mac are integral to the mortgage lending process.
These federally backed institutions provide liquidity, stability, and affordability in the mortgage market by offering ready access to funds for thousands of mortgage lenders.
And while they share these similarities, it’s important to understand their differences, too.
Fannie Mae vs. Freddie Mac Overview
The U.S. government-chartered Fannie Mae and Freddie Macto fund mortgage lending and keep interest rates low.
They also sell and guarantee loans on the secondary market, which helps large institutional investors – including insurance companies and pension funds – generate relatively low-stakes gains.
And, as you may remember from 2008, both have plenty of experience causing (and responding to) national housing crises.
By investing in mortgages, Fannie Mae and Freddie Mac ensure that lenders have the capital they need to underwrite more home loans.
Together, they purchase and guarantee around 2/3 of all U.S. mortgages, making them a crucial part of the lending process despite not providing the actual loans.
Understanding Fannie Mae
FNMA, or the Federal National Mortgage Association, was chartered by Congress in 1938 as a government-sponsored enterprise (GSE) to make housing more affordable.
As part of the New Deal, FNMA was designed to stimulate both homeownership and the banking world as the United States navigated the aftermath of the Great Depression.
In 1968, Fannie Mae was spun off into a privately-owned company and soon listed on the New York Stock Exchange (NYSE).
This shifted their funding from taxpayer dollars to the stock and bond markets and allowed Fannie Mae more leeway in their governance.
The corporation also moved from primarily purchasing FHA loans to other loans, including conventional and conforming loans, from a variety of large banks, credit unions, and non-bank lenders.
Understanding Freddie Mac
The Federal Home Loan Mortgage Corporation, or Freddie Mac, was chartered in 1970 under the Emergency Home Finance Act.
The FMCC was intended to compete with Fannie Mae to reduce interest rates and expand the secondary mortgage market.
In 1989, Freddie Mac also shifted toward a shareholder-owned model under the Financial Institutions Reform, Recovery, and Enforcement Act.
Unlike FNMA, Freddie Mac was able to immediately buy mortgages of all descriptions – not just FHA loans – with a particular focus on 30-year mortgages.
The FMCC also focused on loans serviced by smaller banks and lenders, which allowed it to serve a different set of clientele with similar (often lower-income) needs.
Additionally, whereas Freddie Mac more swiftly kicks mortgages to the secondary market, FNMA retains some loans purchased with agency funds.
What Is the Role of Fannie Mae and Freddie Mac?
Despite their roles as back-end financiers, neither FNMA nor FMCC provide direct loans to homebuyers.
Instead, they work with lenders – Fannie Mae with larger institutions, Freddie Mac with smaller – to establish lending guidelines.
They then purchase loans that meet these guidelines from the primary mortgage market, injecting banks with the capital needed to issue more loans. This process also keeps loan costs and interest rates low.
Once Freddie Mac and Fannie Mae have their loans in hand, they bundle mortgage loans into mortgage-backed securities, or MBSs, to sell to investors on the secondary mortgage market.
These securities often go to institutional investors, insurance companies, and some retirement funds.
Fannie and Freddie use the proceeds from MBS sales to purchase additional loans, and the circle continues.
What Are the Similarities Between Fannie Mae and Freddie Mac?
As federally backed, publicly traded institutions, Fannie Mae and Freddie Mac have obligations to homeowners, investors, and the housing market.
This mission to provide affordability, profits, and stability means that they share several similarities.
Primary Functions
The two organizations’ main similarity comes through in their purpose: to fund mortgage lenders and online mortgage lenders by purchasing the loans after the fact.
This injects liquidity into the primary mortgage market and keeps interest rates low.
Additionally, they drive the secondary mortgage market by packaging and reselling bundles of mortgages as MBSs to investors.
Home Loans
Though FNMA and FMCC buy around 66% of all U.S. mortgages, they won’t back every mortgage.
Instead, they purchase “low risk” mortgages that will readily move on the secondary market, creating profits while lowering costs for homeowners.
They do this by setting the guidelines that all conforming loans must adhere to, including setting term lengths, loan sizes, credit and debt limits, and proof of income requirements.
>> More: Explore the Different Government Home Loan Options
Subprime Mortgage Crisis
Unfortunately, for many, Freddie Mac and Fannie Mae are also synonymous with the 2008 housing crisis.
Due to a deluge of risky subprime mortgage purchases to homeowners who couldn’t afford their loans, foreclosure skyrocketed, the housing market crashed, and housing-related securities bottomed out.
As a result, the U.S. Treasury was forced to bail out FNMA and FMCC to the tune of over $190 billion to keep them solvent.
Though the money has since been repaid, they remain under government conservatorship, with the Treasury owning the bulk of their senior preferred stock.
What Are the Differences Between Fannie Mae and Freddie Mac?
Though Fannie Mae and Freddie Mac share several similarities, they also diverge in several crucial elements.
Creation
Fannie Mae was chartered to help homeowners buy and keep their homes while ensuring banks remained solvent.
Freddie Mac was chartered over 40 years later to serve as Fannie’s competition on both the primary and secondary markets following Fannie’s NYSE debut.
>> More: How to Buy a House
Loan Purchases
Fannie Mae mostly purchases mortgages from larger commercial banks, while Freddie focuses on smaller lenders and credit unions.
Additionally, while Fannie retains a number of MBSs for its own portfolio, Freddie Mac was created in part to compete on the secondary market.
Guidelines
Both Fannie and Freddie buy conventional loans that conform to their internal guidelines.
Typically, they differ when it comes to borrowers’ financial profiles – such as their debt, credit history, and current income – and down payment minimums.
Though it’s not common, it’s possible for one GSE to approve amortgage application while the other denies it.
Lending Programs
FNMA and FMCC also run different lending programs for borrowers who don’t meet their broad-spectrum guidelines.
Fannie Mae supports around a dozen products, such as purchase, mortgage refinance, and home improvement loans.
Meanwhile, Freddie Mac offers nearly two dozen programs, including acquisition, refinance, and construction loans.
How Fannie Mae and Freddie Mac Affect Your Home Loan
Neither Fannie nor Freddie will impact your day-to-day life – unless you’re buying a home.
Then, they’re responsible for setting the conforming guidelines that your lender will likely strive to meet.
Though lenders don’t have to sell loans to either GSE, it’s in their best interest to ensure the bulk of their mortgages pass the muster.
What Assistance Do Fannie Mae and Freddie Mac Offer Homebuyers?
Both Fannie and Freddie offer programs to help homebuyers – and even tenants – obtain mortgages and stay in their homes.
To start, they offer consumer education programs to inform prospective homebuyers about the benefits, risks, and responsibilities of owning a home. And tenants in some properties may qualify for protection in homes undergoing foreclosure.
Additionally, following the 2008 mortgage meltdown, both Fannie and Freddie run loan modification programs to assist struggling homeowners.
These programs can serve the purpose of a refinance without the cost and time constraints and may lead to lowered interest rates, monthly mortgage payments, and even partial debt forgiveness in addition to longer loan terms.
And when it comes to new homebuyers, both Fannie Mae and Freddie Mac offer several programs to help low- to moderate-income homebuyers afford homes. Two in particular – the HomeReady and Home Possible programs – are popular.
- Fannie Mae runs the HomeReady and HomePath program. Homebuyers can front as little as 3% down with a credit score above 620 and household income below 80% of the area median.
- Freddie Mac runs the comparable Home Possible program for homebuyers who can put at least 3% down. They also offer looser restrictions on down payment assistance and non-occupant co-borrower status.
Fannie Mae and Freddie Mac Home Loan Requirements
To ensure they can resell mortgages, Fannie Mae and Freddie Mac only buy loans that conform to “safe” guidelines. For the most part, these requirements are closely aligned.
- Debt-to-Income Ratio: Both GSEs have Debt-to-income maximums around 40-45%, though some borrowers may qualify with a DTI as high as 50%.
- Credit Scores: Conventional conforming loans typically require a minimum credit score between 620 and 640.
- Down Payments: Depending on the loan program, your down payment minimum may range from 3-5%.
- Total Loan Limit: FNMA and FMCC borrowers can’t take out loans larger than the conforming limit of $548,250 in most of the U.S. However, some high-cost areas have limits over $820,000.
- Verified Income: Fannie and Freddie also require borrowers to prove their income and employment information with proper documentation.
How Do I Know if My Mortgage is Fannie Mae or Freddie Mac?
Both FNMA and FMCC provide online tools to determine if either owns your loan. You can find Fannie Mae’s here and Freddie Mac’s at this link.
Bottom Line: Fannie Mae vs. Freddie Mac
Fannie Mae and Freddie Mac serve similar purposes for homeowners, mortgage security investors, and the U.S. mortgage economy.
If you’re buying a home, chances are that these government-sponsored entities will play a role in your loan options, terms, and costs – even if you never have any direct contact with them.
And if you don’t, you’re probably looking at a government-backed FHA loan, VA loan, or USDA loan instead.
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