Fannie Mae and Freddie Mac are two of the most well-known names in the housing finance industry. While both entities play significant roles in the U.S. mortgage market, they serve distinct purposes and operate under different structures. In this article, we’ll explore the differences between Fannie Mae and Freddie Mac, their histories, functions, and their impact on the housing market.
What Are Fannie Mae and Freddie Mac?
Fannie Mae, officially known as the Federal National Mortgage Association, and Freddie Mac, or the Federal Home Loan Mortgage Corporation, are government-sponsored enterprises (GSEs) established by Congress to provide stability and liquidity to the housing finance market. They were created with the goal of expanding homeownership by increasing access to mortgage credit and facilitating the flow of funds between lenders and borrowers.
Key Differences
1. Structure
– Fannie Mae Fannie Mae operates as a publicly traded company but is chartered by Congress. It was initially established as a government agency in 1938 but became a GSE in 1968. Fannie Mae operates under the conservatorship of the Federal Housing Finance Agency (FHFA) since the 2008 financial crisis.
– Freddie Mac Like Fannie Mae, Freddie Mac operates under a congressional charter and was established as a GSE in 1970. It is also publicly traded on the stock market. Similar to Fannie Mae, Freddie Mac operates under FHFA conservatorship.
2. Market Focus
– Fannie Mae Fannie Mae primarily focuses on the secondary mortgage market, purchasing mortgages from lenders, packaging them into mortgage-backed securities (MBS), and selling them to investors. By doing so, Fannie Mae provides liquidity to the mortgage market, enabling lenders to originate more loans.
– Freddie Mac Freddie Mac operates in a similar manner to Fannie Mae, purchasing mortgages from lenders and securitizing them into MBS for sale to investors. While Freddie Mac also operates in the secondary market, it has historically focused more on supporting affordable housing initiatives and serving smaller lenders.
3. Regulation
– Both Fannie Mae and Freddie Mac are subject to oversight and regulation by the FHFA, which sets their capital requirements, risk management policies, and strategic objectives. However, their day-to-day operations are conducted independently, and they compete with each other in the secondary mortgage market.
4. Market Share
– Historically, Fannie Mae and Freddie Mac have dominated the secondary mortgage market, collectively backing a significant portion of the mortgages originated in the United States. While their market shares have declined since the 2008 financial crisis, they still play a crucial role in providing stability to the housing finance system.
Impact on the Housing Market
Fannie Mae and Freddie Mac play pivotal roles in the U.S. housing market, influencing mortgage rates, underwriting standards, and access to credit. By purchasing mortgages from lenders and securitizing them into MBS, they help ensure the availability of affordable mortgage financing for homebuyers. Additionally, their activities in the secondary market help stabilize mortgage rates and promote liquidity in the housing finance system.
In summary, while Fannie Mae and Freddie Mac share similar missions and operate in the secondary mortgage market, they have distinct histories, structures, and market focuses. Despite their differences, both entities play critical roles in the U.S. housing finance system, providing liquidity, stability, and access to mortgage credit for millions of American homeowners. Understanding the differences between Fannie Mae and Freddie Mac is essential for policymakers, industry participants, and consumers alike to navigate the complexities of the housing finance market.
