Fannie Mae and Freddie Mac are government-backed mortgage companies (or government-sponsored enterprise), and their job is to give the mortgage market stability and affordability. But how exactly do they do that, and why does it matter to you as a homebuyer?
In this article, you'll learn how the two companies operate and how they impact the mortgage market.
Fannie Mae was established in 1938 through the Federal Home Loan Bank Act. Led by President Franklin D. Roosevelt, the vision was to create an avenue that helped Americans realize their homeownership dream. Initially, Fannie Mae was a government agency. However, Congress turned Fannie Mae into a company in 1968 to divert government funding away from Fannie Mae and into the Vietnam war.
While Fannie Mae sells stocks to shareholders as an initial public offering (IPO), it's also considered a government-sponsored enterprise (GSE).
Freddie Mac came about in 1970. Like Fannie Mae, Freddie Mac is a GSE that purchases mortgages. Buying mortgages helps by allowing banks to have more free capital to finance borrowers.
Now that we've established that Fannie Mae and Freddie Mac purchase mortgages from banks to free up bank funds --what comes next? What they do is repackage those mortgages into their portfolios (mortgage-backed securities) to sell to investors on the secondary mortgage market.
Fannie Mae and Freddie Mac lure investors to invest in mortgage-backed securities by guaranteeing payments on those mortgages. The result is more housing funds available and lower interest rates.
And in times of economic hardships (like from a pandemic, for example), Fannie Mae and Freddie Mac help stabilize the mortgage market.
Both GSEs have mortgage programs to assist low-to-moderate income borrowers as well as assistance to first-time home buyers.
Without their specialty programs, many potential homebuyers would not be able to qualify for a home loan. However, since the loans are government-backed, banks can widen their requirements, offering more people opportunities.
The interesting thing is that Fannie Mae and Freddie Mac have played a significant role in both causing crisis and rescuing us from a crisis. Here are some recent examples.
Fannie Mae and Freddie Mac issued about $300 billion worth of subprime mortgages in 2007. While these loans were considered a higher risk, they also brought a higher return. These higher returns helped to uphold higher stock prices, and in an extremely competitive market, this notion is attractive.
However, by summer 2007, many borrowers began defaulting on their mortgage payments. Since Fannie Mae and Freddie Mac were backing the loans, the risk fell on the two companies, and the result was a massive loss of about $8.7 billion. This loss caused their stocks to plummet and investor confidence to falter.
In an attempt to sustain the mortgage market, Congress approved Fannie Mae and Freddie Mac to back more subprime loans. But that only dug the companies even further into a hole. As the crisis continued, our government stepped in and bailed out both companies and authorized the purchase of $100 billion in mortgage-backed securities.
Many homeowners struggled (and continue to struggle) to make their mortgage payments during the global pandemic. Under the CARES Act, the government provided financial relief to homeowners whose loans were federal or GSE-backed.
One protection was a foreclosure provision that didn't allow a lender to start foreclosure proceedings until after December 31, 2020. The second allowed homeowners to request forbearance up to 180 days if financial hardships were due to COVID-19.
Although things have changed throughout the years, FDR's original vision of making the American dream of homeownership more widely available continues. Contact us now to get matched with a Fannie Mae or Freddie Mac loan program.