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Home >> Keeping Your Money Safe
Mortgage Investors - Who are Fannie Mae and Freddie Mac?
I keep hearing/seeing stories in the news about home mortgages where Freddie Mac and Fannie Mae are often mentioned. What are they? |
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- Federal Home Loan Mortgage Corporation (FHLMC) is referred to as
'Freddie Mac."
- Federal National Mortgage Association (FNMA) is referred to as "Fannie Mae."
Both Freddie Mac and Fannie Mae are stockholder-owned companies which are Government Sponsored Enterprises (GSE). Congress started creating GSEs in 1916. Freddie Mac and Fannie Mae are privately owned, but publicly chartered. Both were designed to make mortgage loans and to guarantee them. Their purpose is to provide an improved market for mortgage loans, so more Americans can own homes.
One way to improve home loans is with a guarantee. The guarantee helps reduce the risk to the lender and investor (someone who buys this loan after it is made). The lower risk helps reduce the interest rate of the borrower's loan and the new homeowner can then afford a larger loan and a better home. This helps the economy and is one of the goals Congress had when it created Freddie Mac and Fannie Mae.
Mortgage loans are purchased from loan originators, the banks and mortgage companies that make the loans initially. The loans are held in a pool with other loans guaranteed by Freddie Mac and Fannie Mae, and are sold to investors as mortgage backed securities. When the lender sells the loan, they have that money from the sale to invest in another loan, plus they will have made a small profit when it was sold. This is the incentive to make more loans. But there are problems when home values drop and mortgage loans begin to fall past due.
Loan guarantees from Freddie Mac and Fannie Mae are not insured by the U.S. government. Because of the mortgage crisis, there was fear that these two companies could fail. Together, in 2008 they own approximately one-half of the mortgages in the U.S. To help dispel this fear the U.S. Treasury announced on July 13, 2008, that funds would be made available to both Freddie Mac and Fannie Mae to ensure their financial strength.
On September 7, 2008, the Federal government took charge of Freddie Mac and Fannie Mae in an effort to shore up that part of the mortgage system. If these two entities failed, the costs to Americans would have been greater than the cost of a bailout. The Federal Housing Finance Agency will now have control of the boards and the direction of the companies. More details on the bailout are in this BankingQuestions Q&A.
Published on BankingQuestions.com 07-14-2008, updated 09-09-08
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