Understanding the Roles of Fannie Mae and Freddie Mac

Understanding the Roles of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are two of the largest funding sources for home loans. Yet, many Americans are unfamiliar with these corporations' actual roles in the mortgage industry. To help you better understand the missions of Fannie Mae and Freddie Mac, let's take a look at some frequently asked questions:

What Are the Roles of Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) that act as links between local banks, the federal government and Wall Street. Their mission is to provide ready access to funds on reasonable terms to thousands of banks, savings and loans, and mortgage companies that make loans to finance housing. Fannie and Freddie buy most of the home loans in the United States, hold them or package them into mortgage-backed securities that are sold publicly to investors.

So, Just How Does the Secondary Market Work?

Let's say a home buyer finances her house through a mortgage company such as PennyMac. Because we were approved to work with them and made sure the loan met their guidelines, either Fannie Mae or Freddie Mac will purchase that loan from us. They will either keep the loan or bundle it with similar loans into a security. The GSE will then sell this security to investors, which include institutional investors such as pension funds and endowments.

The result is increased market stability, affordability, and liquidity – PennyMac has more money to originate new mortgages, Fannie Mae and Freddie Mac have increased capital to buy more loans, and the investor makes a profit from the interest earned on the borrower's monthly mortgage payments.

Is There a Difference Between Fannie Mae and Freddie Mac?

The missions of Fannie Mae and Freddie Mac are virtually the same – “to provide liquidity, stability, and affordability to the mortgage market.” There are some differences in their origins, however.

Fannie Mae and Freddie Mac were chartered for different purposes. The U.S. government created the Federal National Mortgage Association (Fannie Mae) in 1938 as part of President Franklin D. Roosevelt's New Deal. Its original purpose was to buy mortgages from private companies to encourage lending during the Great Depression. Congress later created the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970 to further increase the availability of mortgages.

Do You Benefit from Fannie Mae and Freddie Mac?

While many consumers never come in direct contact with Fannie Mae and Freddie Mac, these two GSEs do ultimately provide buyers some additional perks through their local banks. Benefits include:

  • Lower interest rates and origination fees
  • Customizable mortgage programs, helping low- to moderate-income families find more affordable home financing options
  • Fannie Mae and Freddie Mac sponsored educational programs, assisting first-time buyers in understanding the various loan choices available to them

In Summary

Fannie Mae and Freddie Mac are two of the largest funding sources for home loans. These mortgage giants help maintain stability, affordability and liquidity within the mortgage industry. But most importantly, these GSEs help homeowners secure lower interest rates and origination fees, obtain customizable mortgage programs, and access home financing education programs.