Fannie Mae and Freddie Mac are government-sponsored enterprises created by the United States Congress.
The purpose of a government-sponsored enterprise (GSE) is to streamline market efficiency and increase the accessibility of credit to specific parts of the economy. Two of the GSE’s that are vital to the mortgage industry are Fannie Mae (FNMA) and Freddie Mac (FHLMC).
The Federal National Mortgage Association, known more commonly as Fannie Mae, was created in 1938 as a part of President Franklin Roosevelt’s New Deal.
Fannie Mae was created to provide liquidity to the real estate and mortgage markets. They do this by purchasing mortgages from banks, credit unions, mortgage companies, and savings & loan associations. These loans are then bundled into mortgage-backed securities (MBS) and sold into the secondary market to various investors; such as pension funds, hedge funds, or insurance companies.
In 1970, the Federal Home Loan Mortgage Corporation, or Freddie Mac, was founded.
U.S. Congress commissioned Freddie Mac to act similarly to Fannie Mae, but with an emphasis on buying mortgages from smaller thrift banks. Like Fannie Mae, Freddie Mac is a conduit on the secondary market by buying mortgages and selling MBSs. They also hold mortgages in the form of bonds.
Fannie Mae’s HomeReady and Freddie Mac’s Home Possible are slightly different from each other.
HomeReady and Home Possible are the low down payment mortgages that each enterprise offers. For first time homebuyers, both agencies require a minimum borrower contribution of 3% of the purchase price.
Both agencies perform a handful of the same functions.
Fannie Mae and Freddie Mac still do what they were created to do – buy mortgages and sell them as securities. Not only does this provide liquidity to the market, but it also reduces the interest rate risk for the financial institutions making the mortgages. Neither enterprise services any loans. Here at Lyons Mortgage, we service all of our conventional mortgages. Both enterprises also set standard lending guidelines for conventional mortgages.
Fannie Mae and Freddie Mac are pillars that ensure the prosperity of the mortgage industry by acting as conduits on the secondary market and setting standard lending guidelines.