Fannie Mae and Freddie Mac are federally backed home mortgage companies created by the United States Congress. Neither institution originates or services its own mortgages. Instead, they buy and guarantee mortgages issued through lenders in the secondary mortgage market. Show
The two entities virtually monopolized the secondary mortgage market until the 1990s. That's when growing federal regulation and new legislation that allowed banks and other financial companies to merge sparked more competition from conventional companies. Still, Fannie Mae and Freddie Mac continue to dominate the secondary mortgage market in the U.S. today, despite concerns about being two of the largest too big to fail companies. Together, these agencies make the mortgage market more liquid, stable, and affordable by providing liquidity and guarantees to thousands of banks, savings and loans, and mortgage companies in the U.S. Here's a look at how the two work, their roles in the 2008 financial crisis, and what they're doing today to help homeowners and renters during the COVID-19 pandemic. Key Takeaways
What Is Fannie Mae?In the early 20th century, homeownership was out of reach for many people in the United States. Unless you could pay cash for an entire home (which few people could), you were looking at a prohibitively large down payment and a short-term loan that would culminate in a big balloon payment. During the Great Depression, nearly one in four homeowners lost their homes to foreclosure, the banks didn't have any money to lend, and the nation faced a real housing crisis. Congress responded in 1938 by creating the Federal National Mortgage Association (FNMA), better known as Fannie Mae, to provide reliable, steady funding for housing. It brought a new type of mortgage to the market: the long-term, fixed-rate loan with an option to refinance at any time. For decades, Fannie Mae was the dominant buyer and seller of government-insured mortgages. Congress eventually did two things to boost competition in the secondary mortgage market:
History of Fannie MaeFannie Mae was created as a federal government agency in 1938 as part of an amendment to the National Housing Act. Fannie Mae initially bought mortgages insured by the Federal Housing Administration (FHA) and later added loans guaranteed by the Veterans Administration (VA) to the mix. Fannie Mae was converted into a public-private, mixed-ownership corporation in 1954 under the Federal National Mortgage Association Charter Act. It became privately owned in 1968 and two years later became authorized to buy conventional mortgages in addition to FHA and VA loans. The agency started to issue mortgage-backed securities (MBS) in the 1980s to provide more liquidity in the mortgage investment market. It gets the money to buy mortgage-related assets by issuing assorted debt securities in the U.S. and international capital markets. What Is Freddie Mac?Freddie Mac is the unofficial name of the Federal Home Loan Mortgage Corporation. It was established in 1970 under the Emergency Home Finance Act to expand the secondary mortgage market and reduce interest rate risk for banks. In 1989, it was reorganized and turned into a shareholder-owned company as part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Freddie Mac's charter is quite similar to Fannie Mae's in that it expands the secondary market for mortgages and MBSs by buying loans made by banks, savings and loans, and other lending institutions. But unlike Fannie Mae, which buys mortgages from major retail and commercial banks, Freddie Mac buys its loans from smaller banks, such as thrift banks, that focus on providing banking services to communities. What Do Fannie Mae and Freddie Mac Do?Fannie Mae and Freddie Mac have similar charters, mandates, and regulatory structures. Each buys mortgages from lenders to either hold in their portfolios or repackage as MBSs that can be sold. In turn, lenders use the money they get from selling mortgages to originate more loans. This helps individuals, families, and investors access a continuous and stable supply of mortgage funding. According to their charters, Fannie Mae and Freddie Mac "establish secondary market facilities for residential mortgages [and] provide that the operations thereof shall be financed by private capital to the maximum extent feasible." Both entities are mandated to do the following:
Fannie Mae has one additional responsibility according to its charter: to manage and liquidate federally-owned mortgage portfolios to minimize any adverse effects on the residential mortgage market and minimize losses to the federal government. Who Regulates Fannie Mae and Freddie Mac?According to Fannie Mae and Freddie Mac's congressional charters, which gave them government-sponsored enterprise (GSE) status, they operate with certain ties to the U.S. federal government that provide a financial backstop. For instance, in September 2008, during the height of the financial crisis, they were placed under the direct supervision of the federal government. During normal times, the government ties remain a bit more hidden, but nonetheless important. According to their congressional charters:
The FHFA regulates, enforces, and monitors Fannie and Freddie's capital standards and limits the size of their mortgage investment portfolios. HUD is responsible for Fannie and Freddie's general housing missions. An Implicit GuaranteeFannie and Freddie's GSE status has created certain perceptions in the marketplace of safety. One was that the federal government would step in and bail out these organizations if either firm ever ran into financial trouble, as was seen in the lead-up to the Great Recession. This is known as an implicit guarantee. Because the market believed in this implicit guarantee, Fannie Mae and Freddie Mac were allowed to borrow money in the bond market at lower yields than other financial institutions could. The yield on Fannie Mae and Freddie Mac's corporate debt, known as agency debt, has historically been about 35 basis points higher than U.S. Treasury bonds. AAA-rated financial firm debt, by comparison, has historically yielded about 70 basis points more than U.S. Treasury bonds. Thirty-five basis points may not seem like much, but it made a huge difference because of the trillions of dollars involved. Role in the Financial Crisis of 2008With a funding advantage over their Wall Street rivals, Fannie Mae and Freddie Mac made sizable profits for more than two decades throughout the 1990s and early 2000s. Over this time period, there was a frequent debate about Fannie and Freddie among economists, financial market professionals, and government officials. Did the implied government backing of Fannie and Freddie actually benefit U.S. homeowners? Or was the government just helping the companies and their investors while creating a moral hazard? Fannie Mae and Freddie Mac were given a government-sponsored monopoly in a large segment of the U.S. secondary mortgage market. This monopoly—combined with the government's implicit guarantee to keep these firms afloat—would later contribute to the mortgage market's collapse. In 2007, Fannie Mae and Freddie Mac began to experience large losses on their retained portfolios, especially on their Alt-A and subprime investments. In 2008, the sheer size of their retained portfolios and mortgage guarantees led the FHFA to conclude that they would soon be insolvent. On March 19 of that year, federal regulators allowed the two firms to take on another $200 billion in debt in the hopes of stabilizing the economy. However, by Sept. 6, 2008, it was clear that the market believed the firms were in financial trouble, and the FHFA put the companies into conservatorship. They received $190 billion in bailout funding and have since paid it back but are still in conservatorship. Of course, a long list of missteps led to the Great Recession. However, critics say Fannie and Freddie created an enormous amount of debt and credit guarantees in the years leading up to 2007, and that Congress should have recognized the systematic risks to the global financial system that these firms posed. In September 2019, the Treasury and FHFA announced that Fannie Mae and Freddie Mac could start keeping their earnings to shore up capital reserves of $25 billion and $20 billion, respectively. The move was a step toward transitioning the two out of conservatorship. Role in the COVID-19 PandemicIf you have been impacted by the COVID-19 pandemic, you may have concerns about paying your mortgage or rent. The CARES Act offered protections for homeowners with Fannie Mae and Freddie Mac mortgages. Under the CARES Act, lenders and loan services were prohibited from starting a judicial or nonjudicial foreclosure against you—or finalizing a foreclosure judgment or sale until March 31, 2021. The deadline was extended several times throughout the pandemic and finally expired on July 31, 2021. You can request a mortgage forbearance for up to 180 days (and potentially extend it another 180 days) if you have a financial hardship due to the COVID-19 pandemic. Additionally, the FHFA also put into place more flexible lending and appraisal standards to make sure that homebuyers can close on loans during the pandemic and that all parties involved can maintain social distancing throughout the process. The federal government provided assistance for individuals who became unemployed as a result of the pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Consolidated Appropriations Act of 2021, and the American Rescue Plan all boosted unemployment insurance benefits temporarily through three programs:
These three unemployment-related programs expired on Sept. 5, 2021. Unemployed individuals may still qualify
for benefits as long as they are within the first 26 weeks of their benefits. Mortgage Relief ProgramIf you have a Fannie Mae mortgage and can't make your payment due to a COVID-19-related job loss, income reduction, or illness, your mortgage servicer can help with mortgage relief options, including:
Fannie Mae has another program, which is called the Disaster Response Network, that can help with the broader financial implications of the COVID-19 emergency. The Disaster Response Network provides access to HUD-approved housing counselors for homeowners with Fannie Mae-owned loans and renters in Fannie Mae-financed properties. The counselors can create personalized plans, provide financial coaching and budgeting, and support you for up to 18 months. If you're worried about making your mortgage payments, call your mortgage servicer—the company listed on your monthly statement—to ask for help. Freddie Mac Mortgage ForbearanceIf you have a Freddie Mac-owned mortgage, you may be eligible for help if you have been directly or indirectly impacted by the COVID-19 pandemic. There are currently several mortgage relief options if you can't make your mortgage payment due to a loss or decline in income, including:
Forbearance is not forgiveness. Ask your mortgage servicer about your post-forbearance options. Be wary if the option is a balloon payment rather than simply adding the unpaid months to the end of your mortgage. More Flexible Lending and Appraisal StandardsThe easing of lending and appraisal standards for homebuyers applying for a Fannie Mae- and Freddie Mac-backed mortgage during the pandemic was extended by the FHFA to July 31, 2021, as the final deadline. They allowed:
The Bottom LineFannie Mae and Freddie Mac are charged with keeping the U.S. mortgage market running smoothly. Both companies buy mortgages from various lenders, which helps maintain a steady and reliable source of mortgage funding for individuals, families, and investors. The housing industry has kept a watchful eye on how the COVID-19 situation has impacted Fannie Mae and Freddie Mac, not to mention the 28 million homeowners with mortgages backed by these agencies. The FHFA anticipated the pandemic would lead to billions in additional expenses to be shouldered by both
Fannie Mae and Freddie Mac because of the pandemic—at least until the moratorium expired. This was, of course, on top of the $6 billion in costs already incurred by the two. The full extent will only be known when the agencies release details at the end of the fiscal year. What are Fannie Mae guidelines?Fannie Mae guidelines require the lender to review the property's title history and ensure it's clear of any prior ownership claims from previous owners or any judgments or liens, such as unpaid property taxes. Title insurance is required to cover the loan amount on the purchase or refinance of any Fannie Mae loan.
What does it mean if a loan is conforming quizlet?Conforming: A mortgage that is equal to or less than the dollar amount established by the conforming-loan limit ($484,350 - most places) set by the Federal Housing Finance Agency (FHFA) and meets the funding criteria of Freddie Mac and Fannie Mae.
What is an agency loan?WHAT ARE AGENCY LOANS? Agency loans are conventional fixed-rate, first mortgage loans secured by stabilized income-producing multifamily and manufactured housing communities that meet Fannie Mae and/or Freddie Mac underwriting guidelines.
Which of the following is not an institutional lender?Which of the following is NOT an institutional lender? Mortgage companies (Not government regulated lenders).
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Loans that meet the underwriting standards of Fannie Mae or Freddie Mac are known as
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