Fannie Mae versus Freddie Mac??
We have all heard the terms and we think we know what they are all about and how they work, right? Well, I know that I get confused sometimes and it never hurts to brush up. Today, we see news about our economy everywhere we turn. From the news, the newspapers, magazines, emails, billboards etc.… The bulletins about the state of the economy and the real estate market are laced with jargon, acronyms and abbreviations that can get tricky!
Here, I am addressing the differences of Fannie Mae and Freddie Mac. For all we know, there are people out there asking the question, “Who are these people?” Well, they aren’t people at all; they are publicly traded, government-sponsored enterprises within the financial services industry of our economy. (What a mouthful!)
The Federal National Mortgage Association, commonly known as Fannie Mae, found its origin in 1938. It spawned as a part of President Roosevelt’s New Deal during the Great Depression. Fannie Mae is $3 trillion government sponsored corporation, however it has been publicly traded since 1968. A leading provider of mortgage credit, Fannie Mae is in the secondary market, meaning they don’t lend directly to consumers. Fannie Mae and its constituents are committed to providing sustainable homeownership.
- Their purpose: to expand the secondary mortgage market.
- How they do it: through mortgaged backed securities (MBS). These MBS are asset-backed securities (securitized mortgages), which represent a claim on cash flows from the mortgage process (the process of securitization). These mortgages allow lenders to reinvest their assets, reducing the reliance on thrifts (savings deposits, mortgages and other loans) and in turn increasing the number of lenders in the mortgage market.
- Through this process: Fannie Mae keeps the liquidity flowing to mortgage lenders, including thrifts, local and national banks, credit unions and other financial associations. This liquidity has provided our market with has strengthened the underwriting ability and eligibility standards, which in turn have guaranteed borrowers’ access to mortgages they can afford over the long term (15-30 years).
Other strides the organization has made include educating its lenders on loan quality. When lenders understand the loan and its quality, future risk is reduced for both the lender and Fannie Mae. This has just been a snippet on what Fannie Mae does for our financial market; they play a major role in our capital market, single-family business, and multifamily business and rental markets.
Also a public, government-sponsored enterprise is the Federal Home Loan Mortgage Corporation, better known as Freddie Mac. Freddie Mac got its start in 1970 and was created with the intention to expand the secondary mortgage market (just like Fannie Mae!).
The general idea behind Freddie Mac is, they buy mortgages on the secondary market, groups them, to then sell them as mortgage backed securities (MBS) to investors in the open market. (Ah-hem, just like Fannie) Again, the secondary market increases the supply of money and availability of money (liquidity) to mortgage lending and for new home purchases. Freddie Mac operates under a conservatorship beneath the Federal Housing Finance Agency (FHFA). Their mission is to “meet the needs of the mortgage market by making a homeownership and housing more affordable, reduce the number of foreclosures and help families keep their homes.” Freddie Mac has three core business lines that provide a consistent resource for mortgage funding for the housing markets in the US. The three businesses are: single-family credit guarantee business, multifamily business and investment business.
So far, Fannie Mae and Freddie Mac are not really all that different. Actually, more like identical.
- They are in the same business: home mortgages.
- Their business models are almost identical: buy mortgages on the secondary market, pool, them and sell that as mortgage backed securities in the open market.
- When it comes to the government backing (subsidies, direct funding, explicit guarantees, implicit guarantees etc.) it is exactly the same for both Fannie Mae and Freddie Mac.
- They are both privately owned by shareholders, but receive government funding and they are both traded on the public stock market.
The difference between the two really comes down to where they buy their mortgages. Fannie Mae primarily buys mortgages issued by banks. Freddie Mac primarily buys mortgages issued by thrifts. Another difference is in how and when they were created. The main point, these mortgage giants had a lot to do with the real estate crisis and play a huge role in our current economy.