Fannie Mae and Freddie Mac Overview

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs) in the United States that play a crucial role in the secondary mortgage market. Their primary purpose is to provide liquidity, stability, and affordability to the housing market.

The Secondary Mortgage Market

The secondary mortgage market is where existing mortgages and their servicing rights are bought and sold among investors. Fannie Mae and Freddie Mac operate in this market by purchasing mortgages from primary lenders, such as banks and credit unions. This action allows the primary lenders to replenish their funds and issue new loans, thus keeping the mortgage market flowing.

Key Functions1. Purchasing and Securitizing Mortgages

Both GSEs buy mortgages that meet specific criteria (often referred to as "conforming loans"). They then pool these loans together and create mortgage-backed securities (MBSs) which are sold to investors. This process is called securitization.

2. Providing Liquidity

By consistently purchasing mortgages, Fannie Mae and Freddie Mac ensure that primary lenders always have a way to sell their loans, which encourages them to keep making new loans, even when credit markets are tight.

3. Setting Standards

The criteria they set for purchasing mortgages (conforming loan limits, underwriting standards, etc.) become the de facto standards for a significant portion of the U.S. mortgage market.

Differences Between Fannie Mae and Freddie Mac

While their missions are similar, there are slight distinctions in their history and focus.

Feature	Fannie Mae (FNMA)	Freddie Mac (FHLMC)
Established	1938	1970
Initial Focus	Insured (FHA) and VA loans	Conventional mortgages
Current Focus	Larger commercial banks	Smaller banks and "thrift" institutions
Legal Structure	Publicly traded company in conservatorship	Publicly traded company in conservatorship

The Role of Conservatorship

In September 2008, during the financial crisis, both Fannie Mae and Freddie Mac were placed into government conservatorship under the Federal Housing Finance Agency (FHFA). This action was taken to stabilize the housing market and prevent the potential collapse of the institutions.

The FHFA has maintained control over the GSEs since then, guiding their operations and ensuring they fulfill their public mission while managing their financial recovery. Future plans regarding the status of the conservatorship are subject to legislative and administrative decisions.