Mortgage Daily

Published On: December 16, 2022

Fannie Mae and Freddie Mac Are Like Salt and Pepper

Rarely is one mentioned without the other. And in many respects, Fannie Mae and Freddie Mac complement one another and cooperate. However, they also have significant variances.

Fannie Mae’s successor, Freddie Mac, was designed to be its chief competitor. Their competitiveness in the mortgage market contributes to low-interest rates for American homeowners.

The most important distinction between Fannie Mae and Freddie Mac, if you’re in the market for a mortgage, is that both organizations establish eligibility requirements for mortgages. However, one may be more accommodating to your circumstances and provide a lesser fee.

Ensure you engage with a lender who offers Fannie Mae and Freddie Mac-backed loans. They will be able to provide you with more reasonable pricing.

To understand more about how the two firms differ and how they affect your mortgage, please continue reading.

Compare and contrast Fannie Mae with Freddie Mac

What Fannie Mae and Freddie Mac Do Is Comparable

Both Fannie Mae and Freddie Mac engage in the secondary mortgage market. This implies that they purchase mortgages from local lenders, package them as securities, and then sell the interest to global investors.

By doing so, Fannie Mae and Freddie Mac attract additional investment capital to the mortgage industry. More investment capital reduces interest rates for purchasers.

Together, Fannie and Freddie facilitate the majority of today’s low-cost, low-risk mortgages.

Another parallel? In 2008, following the housing market collapse, the federal government acquired both enterprises. Court proceedings are now determining whether or not the two will continue in “conservation” (more on that below).

Fannie Mae and Freddie Mac are in it together for the long run, regardless of the outcome.

How Fannie Mae and Freddie Mac Help You Save Money

As a mortgage borrower, you cannot apply for a loan at your local Fannie Mae or Freddie Mac location. This is because neither company sells mortgages.

Instead, the following occurs:

  • You obtain a mortgage from a bank or mortgage lender.
  • This mortgage is sold by the lender to Fannie Mae or Freddie Mac.
  • The money Fannie and Freddie pay for mortgages is reinvested in the local bank and lender capital pool.
  • These lenders utilize the proceeds to extend additional mortgages to more consumers.
  • More loan money — i.e., more supply – reduces lending rates for all borrowers.

Fannie Mae and Freddie Mac obtain most of their funding from global investors by selling mortgage-backed securities (MBS). MBS are produced by combining thousands of mortgage loans into a single asset.

Due to the additional earnings that Fannie and Freddie contribute to the U.S., there is enough money to go around. Thus, customers do not compete for scarce cash, and interest rates remain relatively low.

Conventional Loans Guaranteed by Fannie and Freddie

Fannie Mae and Freddie Mac purchase around 66% of all U.S. mortgages. However, they will only back some mortgages. They must acquire “low-risk” loans to sell them on the secondary market and make their investment worthwhile.

Fannie Mae and Freddie Mac establish standards for the sorts of loans they’ll purchase to ensure their investments are low-risk. “Conventional” or “conforming” loans are mortgages that adhere to specific parameters.

For example, conforming mortgage terms can be up to 30 years. Additionally, there are lending limitations to ensure that Fannie Mae and Freddie Mac do not purchase excessively large mortgages. In addition, creditors must confirm the borrower’s ability to repay the debt. There are several other criteria.

Nevertheless, borrowers who do not meet Fannie/Freddie criteria are sometimes in need of luck. Many will meet the more flexible requirements for a loan guaranteed by the government, such as FHA, USDA, or VA.

Differences: Fannie Mae vs. Freddie Mac Lending Criteria

All loans acquired by Fannie Mae and Freddie Mac are “conforming” or “conventional.” However, the two companies’ policies are different.

You may qualify for a traditional loan backed by one agency but not the other, depending on your specific financial profile – credit history, debt levels, current income, etc.

Therefore, we advise selecting a lender that provides Fannie Mae- and Freddie Mac-backed loans. They will be able to run your profile through both firms and determine where you may obtain approval more readily.

History of Fannie Mae and Freddie Mac

The history of Fannie Mae, the older of the two corporations, stretches back to the Great Depression.

In the 1930s, the housing market, like all other industries, was severely affected. One-fourth of the population was unemployed. In certain areas, demolishing homes was less expensive than selling them through foreclosure.

During the Great Depression, thousands of banks collapsed, and those that survived had little capital. They had difficulty making mortgage payments.

In 1938, the government founded the Federal National Mortgage Association (FNMA) to revive the housing market. Today, the FNMA is known as Fannie Mae.

The establishment of Fannie Mae was a critical step toward ending the Great Depression.

Fannie Mae reignited the system of mortgage financing. To illustrate, consider the following scenario:

A local bank has $375,000 to lend for mortgages. During the Great Depression, this amount could have financed 100 houses at $3,750 each. However, once the $375,000 had been dispersed, the bank had out of money to lend.

Then Fannie Mae arrived. It purchased the mortgages from the bank, allowing it to lend money again.

With an increase in house sales, employment increased, and property prices began to climb. The establishment of Fannie Mae was a major step toward ending the Great Depression.

Fannie Mae Goes Public

Fannie Mae established a publicly listed firm in 1968.

However, it was not a corporation in the same sense as Google or General Motors. It was a government-sponsored enterprise with distinct benefits.

Fannie Mae, for instance, may directly borrow up to $2.25 billion from the Treasury. It was exempt from paying state and municipal taxes. It sold shares but was not required to comply with several securities rules.

These benefits allowed Fannie Mae to borrow funds at a lower cost. Additionally, it guaranteed investors of the company’s safety.

Which Contributes to the Development of Freddie Mac

If Fannie Mae was working so well, why did we need Freddie Mac? Washington was concerned that Fannie Mae was performing too well.

Freddie Mac was founded in 1970 to foster competitiveness. It was created to give lenders an alternative avenue to sell their loans. This was intended to reduce Fannie Mae fees and overall mortgage expenses.

Freddie Mac was established to compete with Fannie Mae. They contribute to reducing one another’s fees and levies, keeping mortgage rates low for consumers.

Like Fannie Mae, Freddie Mac is a GSE. It had access to the same line of credit as the Treasury, exemptions from state and local taxes, and the ability to disregard securities rules.

Even though the two organizations appear nearly identical from the outside, they are in a continual battle for the mortgage business.

Are Fannie Mae and Freddie Mac Government-Owned?

In 2008, due to the mortgage crisis, the federal government took over Fannie Mae and Freddie Mac. The government does not own the two businesses. Instead, it possesses guarantees that permit it to acquire a controlling stake in Fannie and Freddie at any moment.

The status of Fannie and Freddie is “government conservatorship.”

According to Pro Publica, Fannie Mae got federal loans totaling $120 billion. It has returned around $185 billion. This represents about $65 billion in profit for the Treasury.

Similar circumstances apply to Freddie Mac. According to Pro Publica, it was granted $71.6 billion in federal financing. It has returned $122.2 billion.

The takeover of Fannie Mae and Freddie Mac is now being litigated in court. Shareholders have filed a lawsuit. Why? Because it is still being determined whether the two GSEs ever experienced financial difficulties.

Fannie Mae and Freddie Mac had significant liquidity portfolios, access to the debt market, and over $1.5 trillion in unpledged assets; the federal government stated only weeks before they were taken over. Not exactly indicative of financial difficulties.

There are currently several proposed changes to Fannie Mae and Freddie Mac’s status. They may become private businesses. They may remain under conservatorship. Nobody knows what will transpire. In the meantime, the government continues to get enormous dividends.

What This All Means for You

Never directly obtain a mortgage from Fannie Mae or Freddie Mac. However, it is essential to understand their requirements and get the most reasonable loan feasible.

Do you qualify for a low-interest Fannie Mae or Freddie Mac-backed loan? To discover out, start your mortgage pre-approval process today.


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