By Bill Lyons | Published on October 6, 2023
TABLE OF CONTENTS

    Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) that play pivotal roles in maintaining the mortgage market’s liquidity, stability, and affordability. By purchasing and guaranteeing mortgages from lenders, these entities ensure funds are consistently available for individuals wanting to buy homes, refinance their mortgages, or tap into their home’s equity with home equity loans. While these two companies often appear to have similar objectives, there are some key differences borrowers should be aware of.

    Understanding the complexities and distinctions between Freddie Mac and Fannie Mae provides insights into the mechanisms that drive the U.S. housing market and its underlying mortgage finance system. Their collective actions influence mortgage rates and lending practices.

    So what are Fannie Mae and Freddie Mac? Keep reading to learn more about these entities, why they matter, and their differences.

    KEY TAKEAWAYS

    • The U.S. government created Fannie Mae and Freddie Mac for different primary reasons.
    • Both GSEs foster liquidity in the mortgage market but have distinct operational mechanisms.
    • Fannie Mae and Freddie Mac influence mortgage rates, loan availability, and housing affordability.

    Freddie Mac and Fannie Mae: Overview

    Freddie Mac and Fannie Mae are integral to the flow and stability of the housing market and mortgage industry. Understanding their roles and how they function is essential for industry professionals and everyday homebuyers.

    By buying mortgages, these entities provide financial institutions with the capital required to make new loans for homebuyers. Fannie Mae and Freddie Mac then bundle the mortgages into mortgage-backed securities (MBS) and sell them to investors, circulating money throughout the lending system.

    What is Freddie Mac?

    The Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac, was established in 1970 to expand the secondary mortgage market and reduce the reliance on Fannie Mae, which came first. Before Freddie Mac, Fannie Mae had been the only institution that federalized mortgage-backed securities.

    By creating Freddie Mac, the government hoped to introduce competition into the secondary mortgage market to promote better pricing and increase the availability of funds for home loans. With both entities, governments wanted to ensure a consistent and continuous flow of funds for borrowers to stabilize the housing market.

    Freddie Mac buys mortgages from financial institutions, packages them into mortgage-backed securities, then sells them to investors. Selling MBS provides lenders with liquidity, allowing them to offer more mortgages to consumers. By channeling funds between lending institutions and investors, Freddie Mac helps to make mortgages more available and affordable to the public.

    What is Fannie Mae?

    The Federal National Mortgage Association (FNMA), referred to as Fannie Mae, predates Freddie Mac and was created in 1938 as part of the New Deal. Its inception aimed at providing local banks with federal money to finance home mortgages during a time of dire financial crisis.

    Fannie Mae operates similarly to Freddie Mac. It purchases mortgages, primarily from commercial banks and mortgage companies, then bundles them into MBS and sells them to investors. The goal remains the same: to increase the availability and affordability of homeownership by ensuring a steady supply of mortgage funds.

    Comparing Freddie Mac vs. Fannie Mae, you’ll see that they both operate within the secondary mortgage market, bridging lenders and investors. Their shared mission to ensure liquidity, stability, and affordability in the mortgage market enables millions of Americans to be homeowners.

    Differences Between Freddie Mac and Fannie Mae

    Fannie Mae and Freddie Mac seem similar since they have a shared mission. However, there are specific differences between these entities.

    Source of mortgage loan

    One of the most significant differences between Fannie Mae and Freddie Mac is where they purchase mortgages. Fannie Mae primarily purchases mortgages from larger commercial banks with a more extensive reach and serves a broader customer base.

    On the other hand, Freddie Mac typically purchases mortgages from smaller banks and credit unions. They’re generally community-based lenders that cater to a more localized clientele or specific member groups.

    Mortgage requirements

    When comparing Fannie Mae vs. Freddie Mac more closely, you’ll find they have different mortgage requirements. Freddie Mac has its own underwriting guidelines, which can sometimes be stricter regarding the required credit score to buy a house and down payment amounts.

    On the other hand, Fannie Mae is often more flexible with certain loan criteria, and its underwriting guidelines can differ in terms of debt-to-income (DTI) ratios, reserve requirements, and other factors.

    Couple reviewing loan programs.

    Loan programs

    Fannie Mae and Freddie Mac also offer different loan programs. Freddie Mac has the “Home Possible” mortgage program, which targets low to moderate-income homebuyers. This program is well known for its flexibility in down payment sources and reduced mortgage insurance requirements.

    In contrast, Fannie Mae offers the “HomeReady” loan program, which is also designed for low to moderate-income borrowers. This program has unique features, such as considering income for non-borrower household members as part of the approval process.

    Fannie Mae and Freddie Mac guarantee conforming loans— mortgages that adhere to their specific guidelines and size limits. These loans aren’t directly insured by the government like VA, USDA, and FHA loans. Conversely, they don’t guarantee non-conforming loans, which are mortgages that fall outside their established criteria.

    Why Borrowers Should Care About Freddie Mac and Fannie Mae

    Comparing Freddie Mac vs. Fannie Mae might not seem important because they serve similar functions in the U.S. housing market and don’t actually issue home loans. However, understanding the role of these GSEs can help borrowers understand mortgages better.

    Firstly, Freddie Mac and Fannie Mae play a significant role in determining the mortgage rates in the market. Purchasing mortgages and bundling them into mortgage-backed securities affect the supply and demand of these investments.

    Changes in demand can influence the interest rates borrowers pay on their mortgages, so Fannie Mae and Freddie Mac’s operations can have a ripple effect that affects the total cost of your home loan.

    These giants also improve homeownership accessibility. Without Fannie Mae and Freddie Mac, lenders might be reluctant to lend large amounts of money over extended periods because of the risk of defaults. By purchasing mortgages from lenders, these two entities provide liquidity to the market, ensuring lenders have the funds to offer new loans.

    Additionally, Fannie Mae and Freddie Mac influence lending criteria. Each has specific underwriting guidelines, and lenders who want to sell their loans to Fannie Mae or Freddie Mac must ensure their loans meet set standards. This process results in more consistency in the lending process, giving borrowers a clear idea of what’s required of them.

    By backing home loans, Fannie Mae and Freddie Mac assure investors, leading to more trust in the mortgage market. This trust trickles down to borrowers, ensuring that loans remain available even during periods of economic downturn.

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    Find Out If a Freddie Mac or Fannie Mae Backed Loan Is Right for You

    Understanding the difference between Fannie Mae and Freddie Mac can help you understand loan interest rates, lending criteria, and more. Without these entities, many people may not even qualify for a home loan because lenders wouldn’t have the necessary funds to lend.

    Determining if a Freddie Mac or Fannie Mae backed loan is right for you depends on your unique financial situation and the current market environment. Griffin Funding is committed to supporting borrowers to help them find the best loan for their unique needs. Apply for a mortgage online today or contact us to learn more about our mortgage programs.

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    Frequently Asked Questions

    What are the benefits of Fannie Mae and Freddie Mac?

    The primary benefit of Fannie Mae and Freddie Mac is to ensure equity in the mortgage market. By purchasing mortgages from lenders, they provide lending institutions with the funds needed to offer more loans to prospective homeowners, ensuring a consistent flow of capital.

    They also indirectly stabilize mortgage rates because of the secondary mortgage market, which can buffer against volatile rate fluctuations. Both entities contribute to the standardization of mortgage underwriting guidelines to promote fairness and transparency.

    How do I determine if Freddie Mac or Fannie Mae owns my mortgage?

    While finding out if your mortgage is owned by Freddie Mac or Fannie Mae won’t impact your loan, you may be interested to know, especially if you're considering loan modifications, refinancing, or seeking forbearance options.

    The easiest way to find out if your mortgage is owned by Freddie Mac or Fannie Mae is to contact your mortgage servicer. You can find their contact information on your monthly mortgage statement or online portal.

    What types of loans are sold to Fannie Mae and Freddie Mac?

    Fannie Mae and Freddie Mac purchase conforming, conventional loans that adhere to established guidelines regarding loan limits, creditworthiness, and down payment. These guidelines ensure that loans meet specific size requirements and borrower criteria.

    Fannie Mae and Freddie Mac loans can be fixed-rate and adjustable-rate mortgages, but they don’t purchase jump or non-QM loans.
    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.