You’ve heard of Fannie Mae and Freddie Mac, but you may not know what they are. Yes, we said what. While we’re sure there are people with these names, when it comes to the mortgage industry, Fannie Mae and Freddie Mac are nicknames based on acronyms given to two Government-Sponsored Enterprises (GSE).
Wondering what all of this means? Don’t worry! We’re here to make sense of it all.
Q: What is a GSE?
A: GSE’s are corporations created by Congress to provide financial services that improve our economy. While run by the private sector, they still receive federal government support.
Q: What is Fannie Mae?
A: Fannie Mae refers to the Federal National Mortgage Association or FNMA.
Q: What is the Federal National Mortgage Association?
A: The FNMA was created in 1938 after the Great Depression. Because the economy was in such a bad place, America needed a boost. President Franklin D. Roosevelt constructed the New Deal to help people get back on their feet. This FNMA was part of the New Deal.
The goal of FNMA was (and still is) to provide access to affordable housing by making sure mortgage companies can lend funds at fair rates. This helped people who normally could not afford mortgages secure financing. It also allowed people who were on the brink of losing their home to refinance at a better rate.
Somewhere along the way, the FN turned into Fannie, the MA turned into Mae, and the nickname just stuck!
Q: Does Fannie Mae provide mortgages?
A: Fannie Mae does not provide mortgages. Fannie Mae helps people gain access to mortgages through Mortgage-Backed Securities, or MBS (more on those in a minute).
Q: What does Fannie Mae do?
A: Fannie Mae buys mortgages from original lenders, mostly large banking institutions. When it purchases a mortgage from the loan originator, that bank is then able to use that money to create a new loan. Then the home loans bought are bundled and sold to investors.
Q: So, what is a Mortgage-Backed Security?
A: A mortgage-backed security (MBS) is a way for investors to profit off the home loan industry without buying or selling mortgages. They do this through the secondary market, which is where mortgages are bought and sold by investors and home loan lenders.
Q: How does a MBS work?
A: When a loan is sold to a GSE like Fannie Mae, it is then grouped in with other mortgages and shares of that bundle are sold to investors. The investors make money as homeowners make their mortgage payments each month.
A: Freddie Mac is the nickname for the FHLMC, which stands for Federal Home Loan Mortgage Corporation.
Q: What is the FHLMC?
A: The Federal Home Loan Mortgage Corporation is a GSE that was founded by Congress in 1970 under the Emergency Home Finance Act.
The Act was brought about because the government wanted to produce more competition in the secondary mortgage market. There was fear among investors that if there was no other government enterprise to work against Fannie Mae, the market would become too crowded leading to higher interest rate risk for banks.
Q: What makes Freddie Mac different from Fannie Mae?
A: Like Fannie Mae, Freddie Mac helps middle- and lower-income home buyers have better access to home loans. It operates in the same way, through mortgage-backed securities. The biggest difference is Freddie Mac buys their mortgages from smaller banks, while Fannie Mae works with larger banking institutions.
Fannie Mae and Freddie Mac also have different down payment guidelines and requirements, and both GSE’s have their own programs to help home buyers of all types receive financing.
Q: Do Fannie Mae and Freddie Mac guarantee everyone can get a home loan?
A: While these GSE’s help expand access to home loans, their existence doesn’t guarantee financing for everyone. Every lender has different requirements that have nothing to do with Fannie or Freddie. If homeownership is your goal, the best thing to do is set a budget and start saving for a down payment and speak to a Home Loan Specialist at Churchill Mortgage.
If you have questions about ways you can work toward achieving your dream of homeownership, reach out to us. The team at Churchill Mortgage is ready to take you call and set you on a smarter path to buying a home.