Fannie Mae and Freddie Mac – A History of Making Mortgage Lending Safe and Secure
February 15, 2013
Fannie Mae History
Fannie Mae is actually an organization that’s much older than people expect. The organization stretches all the way back to the reforms that occurred after the Great Depression under Franklin Delano Roosevelt. It’s easy to see that making owning a home a safe and affordable process has been an American focus for many years. It was founded as the Federal National Mortgage Association, and the acronym for the organization was pronounced “Fannie Mae”, thus earning the organization the nickname for years to come.
In 1968, Fannie Mae went private in order to purchase government backed and non-government backed mortgages. The underlying goal since its foundation has been to provide affordable mortgages and make the dream of owning a home in the United States a reality. Fannie Mae purchases government-backed mortgages from lenders and can provide a number of services on those mortgages after the sale. Additionally, the mortgages purchased by Fannie Mae serve as investments that can be sold to investors.
Typical Services Provided by Fannie Mae
- Creating and distributing annual tax statements
- Communicating about rate and escrow information
- Telephone customer service for borrowers and replying to customers via email
- Processing mortgage payments
Although Fannie Mae doesn’t actually create loans for the mortgages, their rules and criteria heavily impact the rest of the industry. Since many lenders want to maintain a relationship with Fannie Mae, the lenders will implement across-the-board regulations that mirror Fannie Mae’s (such as their strict view of debt to income ratio and the credit worthiness of the applicants) so that those lenders can continue to use Fannie Mae.
Fannie Mae, along with brother company Freddie Mac, was greatly impacted by the rising foreclosure numbers across the country in the last ten years. As Fannie Mae received fewer and fewer monthly payments for mortgages, it was determined that the government would need to take over both organizations with a bottom line goal of enhancing the amount of money available to each. Their main relationship with the government as far as finances are Right now, both of these organizations are known as government-sponsored enterprises since they are privately owned but supported by the government.
Freddie Mac History
Freddie Mac doesn’t have as long of a history as Fannie Mae, but they both get to similar goals: increasing the affordability and number of mortgages available to Americans. The full name of Freddie Mac is the Federal Home Loan Mortgage Corporation that dates back to 1970. The purpose of creating this additional government-sponsored enterprise was to broaden the secondary market for mortgages. Much like Fannie Mae, Freddie Mac buys mortgages from the secondary market and sells them via mortgage backed securities to investors.
Freddie Mac is hoping to reduce the amount of defaulted mortgages by increasing the consumer education about how mortgages work. The Freddie Mac website is full of information for consumers to increase their awareness.
Process for Freddie Mac Loans
- A mortgage borrower receives a loan from a financial institution, such as a bank
- The loan is closed
- The financial institution bundles the loan with others of the same kind to sell the entire group to Freddie Mac (with the option to service it themselves if they wish)
- Freddie Mac takes the “bundle” of mortgages to be sold as investments
Fannie Mae and Freddie Mac: What’s the Difference?
Up until now, it seems as though Fannie Mae and Freddie Mac are just the same organization with different names. Although there are many similarities, the two organizations are actually competition for each other. The reason for the two separate organizations is to prevent a monopoly where one organization could control the market, which tends to lead to unfairness when it comes to consumers. As far as similarities, both are publicly traded, both adhere to the same set of guidelines and regulations, and both were chartered by and fall under the mandate of Congress.
As mentioned above, both of these government-sponsored enterprises are in competition with one another but they don’t face any other reason competition with regard to conforming loans. Their connection with the government allows them to sell securities and notes at a lower yield than private firms. When it comes to non-conforming loans, however, there are competitors for both Fannie Mae and Freddie Mac. Both organizations make it possible for interest rates to be lower for borrowers and provide more options to the market.
For many years, both Fannie Mae and Freddie Mac have made it possible for numerous families in to achieve the affordable mortgage for the home of their dreams. Not only do both organizations provide an important service by purchasing bundled mortgages, but their requirements have encouraged the rest of the industry to adopt and implement similar standards, making mortgage applications more standardized and safer for all.