In the world of mortgage financing, two names frequently mentioned are Fannie Mae and Freddie Mac. Both entities play significant roles in the U.S. housing market, but what exactly are Fannie Mae and Freddie Mac, and how do they differ? In this article, we’ll explore the origins, functions, and key differences between Fannie Mae and Freddie Mac to provide clarity on their roles in the mortgage industry.
Origins and Background:
1. Fannie Mae (Federal National Mortgage Association): Established in 1938 as part of the New Deal, Fannie Mae was initially a government agency aimed at expanding the secondary mortgage market by purchasing mortgages from banks and other lenders.
2. Freddie Mac (Federal Home Loan Mortgage Corporation): Founded in 1970 to provide competition for Fannie Mae, Freddie Mac was created by Congress as a public corporation to promote homeownership and access to affordable housing.
Functions and Roles:
1. Fannie Mae:
– Fannie Mae operates as a government-sponsored enterprise (GSE), but it became a publicly traded company in 1968. It plays a vital role in the secondary mortgage market by purchasing mortgages from lenders, pooling them into mortgage-backed securities (MBS), and selling them to investors.
– Fannie Mae’s mission is to provide liquidity, stability, and affordability to the housing market by supporting mortgage lending and increasing access to homeownership for low- and moderate-income borrowers.
2. Freddie Mac:
– Like Fannie Mae, Freddie Mac operates as a GSE and is publicly traded. It functions similarly to Fannie Mae by purchasing mortgages from lenders, securitizing them into MBS, and selling them to investors.
– Freddie Mac’s primary goal is to stabilize the mortgage market, promote homeownership, and facilitate access to affordable housing. It focuses on providing liquidity to lenders, particularly smaller community banks and credit unions.
Key Differences:
1. Government Ownership: Fannie Mae was initially a government agency and later became a publicly traded company, while Freddie Mac was established as a public corporation from the outset.
2. Corporate Structure: While both Fannie Mae and Freddie Mac operate as publicly traded companies, they have distinct corporate structures and governance models.
3. Market Share: Historically, Fannie Mae has had a larger market share and a more dominant presence in the secondary mortgage market compared to Freddie Mac.
4. Product Focus: While both entities focus on providing liquidity and stability to the mortgage market, they may have slightly different product offerings and underwriting standards.
Regulatory Oversight:
Both Fannie Mae and Freddie Mac are subject to regulatory oversight by the Federal Housing Finance Agency (FHFA), which was established in 2008 to regulate and supervise the activities of GSEs following the financial crisis.
Fannie Mae and Freddie Mac are two prominent players in the U.S. housing finance system, with similar functions but distinct origins and structures. While they both operate in the secondary mortgage market and play critical roles in promoting homeownership and liquidity, understanding the differences between Fannie Mae and Freddie Mac can provide valuable insights into their respective contributions to the mortgage industry. As key components of the housing finance system, Fannie Mae and Freddie Mac continue to play integral roles in supporting the stability and accessibility of the American housing market.
