Fannie Mae and Freddie Mac are a couple of from the federal government’s most well-known children. They play an essential role in the mortgage market, and when you’re wanting to get a home loan, you’ll likely have heard these names show up several times.
Our guide explains Fannie Mae vs. Freddie Mac, how they’re related, and why you need to understand what these bodies are if you’re about to buy a home.
What is Fannie Mae?
Fannie Mae is shorthand for the Federal National Mortgage Association. It was created in 1938 like a direct response to the truly amazing Depression. At that time, many Americans discovered that purchasing a house was impossible – lenders simply couldn’t offer them good terms on their own loans because the risk was too high.
To explain, as being a successful lender (e.g., a bank) is just possible when the amount of cash you’re lending doesn’t place your business in danger if you don’t have it fixed in time. Mortgage-seekers at the time were affected by an unstable job market, which made lenders wary of providing money. They couldn’t justify the risk of non-repayment compared to the capital they held in reserve.
Fannie Mae was made by the federal government as a GSE (Government-Sponsored Enterprise) to purchase FHA (Federal Housing Administration) mortgages from lenders. This gave lenders more capital to mitigate risk. Fannie Mae would be a profitable enterprise for that government since it could either:
- Hold to the loans and accumulate interest on their own value, or
- Repackage and resell the loans to private investors – this became more common later on.
The body enabled lenders to provide mortgages to home-buyers with better terms, providing much-needed liquidity within the U.S. housing market.
What is Freddie Mac?
Freddie Mac was made in 1970 as the Federal Mortgage loan Mortgage Corporation. Its purpose was similar to Fannie Mae, nevertheless its focus was around the “repackage and sell” idea. The secondary mortgage market consists of mortgages private investors buy using a mediator like Freddie Mac.
Freddie Mac started buying up 30-year mortgages from lenders and wasn’t restricted to FHA mortgages like its sister organization. As a competitor of sorts to Fannie Mae, it made selling mortgages more profitable for lenders, once more freeing up capital so they could make loans to home-buyers.
Fannie Mae vs. Freddie Mac: How Could they be Similar?
Today, Fannie Mae and Freddie Mac are somewhat similar enterprises. Although they were created independently as well as for different reasons, their history has followed a definite pattern.
They were both created as GSEs. The federal government initially owned both bodies. They were made to shore up capital for lenders and increase homeownership, thus building liquidity within the U.S. housing market.
- They have terms for lenders. Both organizations can dictate the terms on which they’ll buy mortgages from lenders. This influences the kinds of loans that lenders will offer home-buyers.
- They were both privatized. Fannie Mae was a private company in 1968, 24 months before Freddie Mac came to the scene. Freddie Mac was eventually also privatized in 1989.
- They both played a job in the 00s housing crisis. The housing bubble that developed in the 90s and 00s was because of huge overconfidence for lenders, GSEs, the federal government, and secondary buyers. High-value mortgages received out by lenders and approved by Fannie Mae and Freddie Mac, even though the repayment terms were impossible. This eventually led to an enormous quantity of defaults and a massive loss for lenders, GSEs, and everyone else.
- They were bailed out and therefore are more closely regulated by the government now. The federal government stepped directly into ensure that the GSEs didn’t go bust, but they’re now both overseen by the FHFA (Federal Home Financing Agency).
Fannie Mae vs. Freddie Mac: How Could they be Different?
Since the housing crisis in the late 00s, the real difference has been that Freddie Mac buys loans from smaller lenders, while Fannie Mae has a tendency to purchase mortgages from larger entities like banks.
They provide separate underwriting services to lenders – they are used to determine who's eligible for a loan. The GSEs also offer programs to support people who might find it difficult to buy a house otherwise, e.g. Freddie Mac’s Home Possible program or Fannie Mae’s HomeReady mortgage.
Why Understanding Fannie Mae vs. Freddie Mac Matters for Potential Home Buyers
Finding the right lender is important for homebuyers. Equally, you need to know who's backing your lender – could it be Fannie Mae or Freddie Mac? This will influence the terms your lender is likely to provide you with, and whether you may be entitled to support through the GSEs.
They underwrite different types of mortgages. For instance, if you’re looking for a loan with a smaller deposit, you’ll probably require a Freddie Mac-backed lender. The GSEs don’t “control” lenders, but they have considerable sway over who are able to be provided a mortgage.
How to obtain a Mortgage: Fannie Mae vs. Freddie Mac Guide for Buyers
If you’re likely to get a mortgage, here’s how to prepare:
- Find a lender that suits you. What types of loans do they offer? Are you able to afford their down payment? Are they responsive? Research your lender thoroughly.
- Find out what assist you to can access through the GSE. Confer with your lender about help-to-buy options that could be available through Fannie Mae or Freddie Mac.
- Be confident that you may make repayments. The 00s housing industry crisis was partly brought on by mortgages being handed out that may never be repaid. Have a mortgage that you’re confident you are able to repay regularly – don’t be a hero!
- Apply for a loan. Once you know the GSE backing your lender and just what terms you will get, it’s time to apply for your mortgage.
Final Thoughts
Now you know about Fannie Mae vs. Freddie Mac, you've got a broader knowledge of the housing industry and whether you need to take out a home loan.
Want to find which GSE fits into your budget? Contact they at Associates Mortgage loan right now to find out more.