Fannie Mae vs. Freddie Mac: Key Differences |


Fannie Mae and Freddie Mac are government-sponsored companies that buy and sell home loans on the secondary side mortgage markets. The two help provide affordable financing to homebuyers by providing liquidity to mortgage lenders. Although they have different stories, they are more similar than different. However, there are some differences in how they buy mortgages and what home loan programs they offer. A financial advisor could help you create a financial plan for your home buying needs and goals.

Fannie Mae and Freddie Mac: Basics

Fannie Mae was founded in 1938 as the Federal National Mortgage Association (FNMA), a financial organization owned by the government. Their purpose was to provide lenders with funds to make home loans by buying the lender’s mortgages. The mortgages were combined and repackaged as mortgage-backed securities for sale to investors. Fannie Mae innovated that 30 year fixed mortgage this is still the standard today.

Freddie Mac later joined in 1970 as the Federal Home Loan Mortgage Corporation (FMCC), which like Fannie Mae was wholly owned by the government. The two are often referred to as GSEs, short for “government-sponsored enterprise”. Freddie Mac’s goal was to expand that secondary mortgage market and particularly to compete with Fannie Mae, which dominated the market and had become a private company owned by shareholders a few years earlier. In 1989 Freddie Mac also went into private ownership.

Both GSEs played a role in the real estate crisis that began in late 2007. By encouraging financial institutions to lend freely, they contributed to the unsustainable rise in property prices that fueled the boom and subsequent bust, largely due to intense political pressure. After suffering huge losses on defaulting mortgages, they were bailed out and taken over by the federal government. Armed with Washington’s deep pockets, the GSEs bought nearly all of the mortgages sold after the collapse and helped prevent an even worse debacle.

More recently, the two have played a role in assisting borrowers who have been impacted by the Covid pandemic. The CARES Actofficially called Coronavirus Aid, Relief and Economic Security Act, asked the GSEs to give homeowners leniency for up to 18 months.

How GSEs work with lenders

The GSEs do not actually issue loans homebuyer. Instead, they allow private financial institutions, including banks, to lend. They do this by buying loans from lenders and replenishing lenders’ cash so they can provide more financing. The GSEs make money by keeping some of the loans and collecting interest, but most are repackaged and sold to investors, who then collect the interest that borrowers pay.

2019, Fannie and Freddie acquired 52% of all mortgages in the US and dominates the market between them. Without Fannie and Freddie, it would probably be harder to get a mortgage on a home. And likewise, mortgage lenders would have a hard time raising money to lend.

Because of their dominance, it is important for mortgage lenders to ensure that many of their loans can be sold to the GSEs. Fannie and Freddie set standards for the loans they will buy. In this way, they can reassure the buyers of the mortgage-backed securities that the securities are sound and safe. As an additional incentive, the GSEs guarantee that interest and principal on the loans will be repaid. This further reduces the costs for borrowers.

Loans that meet GSE standards are referred to as compliant or conventional loans. To be compliant, loans must be no more than a certain amount of money, lenders must meet debt-to-income ratios, and a number of other benchmarks must be met.

Generally, the GSEs buy low-risk loans. For example in 2019, 28% of borrowers had a DTI greater than 43%, while only 23% of the loans purchased by the GSEs had DTIs this high. They are less than half as likely to buy loans to borrowers with credit scores below 660.

Compared to their peers in the secondary mortgage market, Fannie and Freddie are more likely to buy refinance loans and 15-year fixed-rate loans. They’re less likely to buy adjustable-rate loans and first-time homebuyer loans.

Fannie Mae and Freddie Mac: Differences

Fannie and Freddie also have some differences. One of the most important is where they get their loans. Fannie Mae mainly buys loans from large commercial banks. Freddie Mac targets smaller banks, credit unions, thrifts and loans.

The two also offer different loan programs. Fannie Maes ready to go The program is aimed at buyers who earn no more than 80% of the median income in their region. Freddie Macs home possible Program allows down payments as low as 3%.

Otherwise, their policies are very similar, although it is possible for a borrower’s application to be denied by one GSE and approved by the other. Lenders use automated desktop underwriting software provided by the GSEs to know in advance if a lender’s application is likely to be approved. Fannie Mae is Desktop Underwriter and Freddie Mac is Loan Produce Advisor.

bottom line

Fannie Mae and Freddie Mac are very similar organizations set up by the federal government to provide liquidity to mortgage lenders and help make affordable home loans available to more people. The two buy most of the US mortgages. Your compliant lending policies greatly affect how lenders lend money. The main difference is that most of Fannie Mae’s loans come from large banks, while Freddie Mac’s market is made up of smaller financial institutions.

Tips for home buyers

  • If you are considering a mortgage on your home, a financial advisor can help you determine what you can afford and how to fit it into your overall financial picture. SmartAsset’s free tool matches you with up to three financial advisors operating in your area, and you can interview your advisor matches for free to decide which one is right for you. When you are ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset mortgage comparison tool helps you compare mortgage rates from top lenders so you can find the one that best suits your needs.

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