When starting to research getting a mortgage, many borrowers may have heard of the names Fannie Mae and Freddie Mac. It seems that any discussion surrounding mortgages includes a mention of one or both of those agencies in some way. While the names seem familiar, not many borrowers know what role they play in the mortgage market. Fannie Mae and Freddie Mac are what’s called government-sponsored enterprises. They don’t originate or provide mortgages directly to borrowers. However, they do provide liquidity to lenders and aid in affordability for borrowers.
Fannie Mae was formed first, by Congress, in 1938. Its official name is the Federal National Mortgage Association, and it was created during the presidency of Franklin Delano Roosevelt during The Great Depression. At the time, few lower- or middle-income families could afford to buy a home.
What Fannie Mae does is provide access to more funds for thousands of lenders such as banks and mortgage companies. It achieves this by buying mortgages from lenders. Fannie Mae will either keep these investments it’s paid for in its portfolio, or package them into what’s called mortgage-backed securities (MBS) and sell them to other investors. Once lenders sell these mortgages to Fannie Mae, they can use the money (or liquidity) to continue to lend to more borrowers.
Freddie Mac refers to the Federal Home Loan Mortgage Corporation, and it functions similarly to Fannie Mae. It was established in 1970, during the Nixon administration, as part of the Emergency Home Finance Act. The goal of this agency was to further expand the secondary mortgage market while also reducing risk for banks. In 1989, Freddie Mac was reorganized and became a company owned by shareholders under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
Freddie Mac’s purpose is similar to Fannie Mae’s. It, too, buys loans from lenders and either keeps them in its portfolio or packages them as MBS for other investors to purchase. And in turn that allows for more liquidity to lenders so they can continue to originate loans. The difference between Fannie Mae and Freddie Mac is that Freddie Mac buys its loans from smaller lenders while Fannie Mae buys from larger entities.
As the Federal Housing Finance Agency states, “by packaging mortgages into MBS and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing. That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers.”
Part 2 of our glossary of mortgage terms explains some of the most common concepts associated with mortgages.
We cover the most common terms associated with securing a mortgage to help you have a greater understanding of the application process.
When looking at how to calculate what an affordable home is, the first step is estimating what your principal and interest would be.