Fannie Mae and Freddie Mac: Understanding Their Role in the Mortgage Market

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What is Fannie Mae? What is Freddie Mac? These government-sponsored enterprises are responsible for helping thousands of people get a home mortgage.

Whether you’re shopping for a mortgage or just occasionally skim financial news headlines, you’ve probably heard of Fannie Mae.

But what is Fannie Mae, anyway? And for that matter, what about her buddy Freddie Mac?

While they may sound like names you’d encounter on a sitcom, they aren’t real people. Rather, they’re oddly cute nicknames for major forces in the mortgage market.

What is Fannie Mae?

Fannie Mae stands for the Federal National Mortgage Association, or FNMA. Over the years, the acronym gave birth to the common name. FN = Fannie, MA = Mae. Silly, but it adds up.

Prior to the establishment of Fannie Mae in 1938, most loans provided to homebuyers were short-term with a balloon payment due at the very end.

With these short-term five or seven-year loans, many borrowers weren’t ready for the big payment due at the end of the loan’s term. Then, factor in the Great Depression of the 1930s. Millions lost their jobs—and their life savings. Those folks weren’t able to pay off a huge balloon payment to a lender.

During the height of the Great Depression, about 25% of Americans were defaulting on their mortgages. Enter Fannie Mae. The FNMA was born in 1938, when the U.S. economy was cratering.

As part of the New Deal, the federal government created Fannie to stimulate the housing market by making mortgages more accessible to lower-income borrowers who might not qualify otherwise.

Fannie also made it easier for banks and lenders to issue loans and many of the FHA-backed loans issued in the 1930s and 1940s were purchased by FNMA.

However, borrowers don’t go directly to Fannie Mae and request a loan. The FNMA operates behind the scenes and works directly with lenders. Think of them as an invisible co-signer on your home mortgage.

They back the loans issued to you by your lender. Fannie Mae reduces the risk for banks and guarantees a lender won’t lose money if a borrower defaults. Which means banks are more willing to lend money to prospective homebuyers, keeping the economy humming.

What is Freddie Mac?

Founded in 1970, Fannie’s brother organization is Freddie Mac, aka the Federal Home Loan Mortgage Corporation, or FHLMC.

Freddie Mac was founded to compete with Fannie Mae and purchase mortgages issued by banks to homeowners. There’s no appreciable difference in the philosophy of the two companies, and Freddie was established to avoid Fannie having a complete monopoly over the mortgage market.

In a nutshell, these two government-sponsored enterprises—hybrids of government agencies and private corporations—help thousands of Americans get loans for homes, so it pays to familiarize yourself with what they do in more detail.

How Fannie and Freddie help homeowners

For starters, Fannie and Freddie don’t actually make loans—which is why you may have only heard about them in vague terms, since you wouldn’t approach them directly for a mortgage. Instead, these organizations purchase other lenders’ loans on the secondary market, package them into mortgage-backed securities, and sell them to investors such as hedge funds.

By buying up banks’ loans, Fannie and Freddie essentially flood these lenders with cash, which they can then turn around and lend to even more home buyers. This, in turn, helps more buyers get homes who might not qualify otherwise.

“They are the behemoths of the housing finance sector, owning or guaranteeing nearly half of all the residential mortgages in the United States,” says David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Fannie Mae and Freddie Mac information for homebuyers

Although its main clients are banks and other big lenders, Fannie Mae does have a consumer-focused website with resources for buyers and borrowers.

Know Your Options is designed to help potential homebuyers and outlines affordable mortgage options, down payment assistance, and mortgage relief programs for borrowers struggling to meet their monthly payment. The company also offers HomeView, a course that’s targeted at first-time homebuyers.

Freddie Mac also offers a suite of education information geared at both homebuyers and renters.

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