Fannie Mae (Federal National Mortgage Association, or FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation, or FHLMC) are government-sponsored enterprises (GSEs) that play a key role in the U.S. housing finance system. They purchase and securitize mortgages, thereby promoting liquidity, stability, and affordability in the mortgage market.
Overview
What Are Government-Sponsored Enterprises?
Government-sponsored enterprises (GSEs) are financial services corporations created by the United States Congress. Although they are privately held, they receive support from the U.S. government to achieve public policy goals, particularly in the housing finance system.
Purpose of Fannie Mae and Freddie Mac
- Liquidity: By purchasing mortgages from lenders, Fannie Mae and Freddie Mac provide liquidity, enabling lenders to offer more loans to homebuyers.
- Stability: They help stabilize the housing market by ensuring a steady flow of funds to the mortgage industry.
- Affordability: Through their activities, they aim to make housing more affordable for Americans.
Historical Context
Both entities were established to fulfill specific needs at different times:
- Fannie Mae: Created in 1938 as part of the New Deal to provide a secondary market for Federal Housing Administration (FHA) insured loans, Fannie Mae was chartered by Congress to enhance the flow of mortgage funds and increase home ownership.
- Freddie Mac: Established in 1970 to further support the secondary mortgage market, Freddie Mac was designed to provide competition to Fannie Mae and improve access to funds for lenders and borrowers alike.
Mechanisms of Operations
Purchasing Mortgages
Fannie Mae and Freddie Mac buy mortgages from lenders. These transactions free up capital for lenders, allowing them to issue new loans and maintain liquidity.
Securitization of Mortgages
The GSEs bundle purchased mortgages into mortgage-backed securities (MBS) and sell them to investors. This process transfers the risk associated with individual mortgages from lenders to investors.
Guaranteeing Mortgages
They also guarantee the timely payment of principal and interest on their mortgage-backed securities, providing confidence to investors.
Comparisons and Differences
- Origination: Fannie Mae and Freddie Mac originate from different legislative acts but serve similar purposes.
- Market Coverage: Both cover different aspects of the market; however, their market functions tend to overlap.
- Business Models: While their core activities are similar, the specific business strategies and structures differ.
Related Terms
- Mortgage-Backed Securities (MBS): Investment products that consist of a bundle of home loans bought from the banks that issued them.
- Secondary Mortgage Market: The market where existing home loans are bought and sold, distinct from the primary market where loans are originated.
- Liquidity: The availability of liquid assets to a market or company.
FAQs
What Is the Primary Role of Fannie Mae and Freddie Mac?
Are Fannie Mae and Freddie Mac Federal Agencies?
How Do They Affect Mortgage Rates?
What Happened During the 2008 Financial Crisis?
References
- Federal Housing Finance Agency (FHFA) - Overview of Fannie Mae and Freddie Mac
- U.S. Department of Housing and Urban Development (HUD) - Historical Context
- The Congressional Research Service - Role of GSEs in the Housing Finance System
Summary
Fannie Mae and Freddie Mac are essential components of the U.S. housing finance system, facilitating liquidity, stability, and affordability. By purchasing and securitizing mortgages, these GSEs ensure continuous access to home loans, contributing significantly to the overall health of the housing market. Despite their challenges, particularly during the 2008 financial crisis, their role remains vital in shaping the homeownership landscape in America.
