Government-Sponsored Enterprises (GSEs) are financial services corporations created by the United States Congress to enhance the flow of credit to specific sectors of the economy, particularly the real estate market. The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, play pivotal roles in the U.S. housing finance system.
Introduction to GSEs
What is a Government-Sponsored Enterprise?
A Government-Sponsored Enterprise (GSE) is a financial institution created by federal law to improve the functioning of capital markets and enhance the availability of credit. The most prominent GSEs in the United States are those related to housing finance, such as Fannie Mae and Freddie Mac.
Origins and Purpose
GSEs were established with the intent of reducing borrowing costs and increasing the availability of funds for certain sectors. They play a crucial role in providing liquidity, stability, and affordability to the mortgage market.
Federal National Mortgage Association (FNMA) - Fannie Mae
Historical Background
Fannie Mae was created in 1938 as part of the New Deal to provide a secondary market for home mortgages, making home-ownership more accessible. It was originally a government-owned entity but became a publicly-traded company in 1968.
Functions and Operations
Fannie Mae operates in the secondary mortgage market by purchasing and guaranteeing mortgages from lenders, thus providing them with capital to issue more loans. This activity ensures liquidity and stability in the mortgage market.
Key Terms Associated with FNMA
- Mortgage-Backed Securities (MBS): Securities issued by FNMA, backed by a pool of mortgages, providing investors with returns in the form of mortgage payments.
- Conforming Loans: Loans that meet Fannie Mae’s underwriting guidelines.
Federal Home Loan Mortgage Corporation (FHLMC) - Freddie Mac
Historical Background
Freddie Mac was established in 1970 to further support the secondary mortgage market and reduce risks for lenders. Like Fannie Mae, Freddie Mac purchases mortgages, pools them, and sells them as securities to investors.
Functions and Operations
Freddie Mac’s primary role is to ensure that there is a continuous and stable flow of funds available to mortgage lenders. By providing this liquidity, Freddie Mac helps increase the availability of mortgage credit throughout the country.
Key Terms Associated with FHLMC
- Mortgage-Backed Securities (MBS): Similar to FNMA, Freddie Mac issues MBS, allowing the transfer of mortgage credit risk away from lenders to investors.
- Non-Conforming Loans: Loans that do not meet Freddie Mac’s purchase criteria but can still be part of securitized products under specified conditions.
Comparisons and Distinguishing Features
Similarities Between FNMA and FHLMC
- Both aim to improve liquidity in the mortgage market.
- Both issue Mortgage-Backed Securities (MBS).
- Both ensure stability and affordability in the housing sector.
Differences Between FNMA and FHLMC
- Fannie Mae typically works with large commercial banks, whereas Freddie Mac often works with smaller banks and mortgage lenders.
- The specific underwriting guidelines and criteria for purchasing loans can vary slightly between the two entities.
Historical Context and Impact
The 2008 Financial Crisis
Both Fannie Mae and Freddie Mac were heavily impacted by the 2008 financial crisis. They were placed into conservatorship by the Federal Housing Finance Agency (FHFA) to stabilize the housing market and prevent broader financial collapse.
Post-Crisis Reforms
In the wake of the 2008 financial crisis, significant reforms were implemented, including enhanced regulatory oversight to ensure their continued role in the housing finance system was safeguarded.
FAQs
What is the main purpose of Fannie Mae and Freddie Mac?
How do Fannie Mae and Freddie Mac help homebuyers?
Are Fannie Mae and Freddie Mac government agencies?
References
- Federal Housing Finance Agency. (n.d.). Accessed 2024.
- Investopedia. (n.d.). Fannie Mae vs. Freddie Mac: How They Compare and Why It Matters. Accessed 2024.
- U.S. Department of Housing and Urban Development. (n.d.). GSEs and the Secondary Mortgage Market. Accessed 2024.
Summary
Fannie Mae and Freddie Mac are instrumental in maintaining the stability and liquidity of the U.S. mortgage market. As GSEs, they ensure that lenders have sufficient funds to offer loans, thereby promoting homeownership and contributing to the broader economic stability. Their roles, while similar, also complement each other in their approach to supporting large and small banking institutions, respectively. Post-2008 reforms have strengthened their oversight and role in the housing finance system, reinforcing their critical function in the financial ecosystem.
