The Federal National Mortgage Association (more commonly known as “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) own or guarantee nearly half of all U.S. mortgages and 90% of new ones. But do you understand what these entities really are and what they do? Read on to learn more about Fannie Mae and Freddie Mac’s role in the mortgage industry.
Government Sponsored Enterprises
Fannie Mae and Freddie Mac are "government-sponsored enterprises" (GSEs). This means that they are privately owned, but they receive support from the federal government. Fannie Mae was chartered (established) in 1938, and Freddie Mac was chartered in 1970.
Fannie Mae and Freddie Mac Do Not Make Loans
Fannie Mae and Freddie Mac support stable funding for the housing and mortgage markets, but they do not make loans directly to home buyers. Rather, they support the nation’s housing finance system though the secondary mortgage market. This means that banks, credit unions, and other retail financial institutions originate home loans to borrowers, which they then often sell to Fannie Mae or Freddie Mac. In this way, Fannie Mae and Freddie Mac provide liquidity for mortgage lenders, which can use the capital they receive from Fannie and Freddie to fund additional mortgages.
Fannie Mae and Freddie Mac hold some of the mortgages that they purchase, and some are "securitized."
Securitization occurs when Fannie Mae and Freddie Mac take the loans they purchase and aggregate or pool them into debt securities called mortgage-backed securities, which are then sold to investors. To reduce investors’ risk, Fannie Mae and Freddie Mac guarantee payment of principal and interest on their mortgage-backed securities in exchange for a fee.
Alternatively, Fannie Mae and Freddie Mac may also hold these loans or purchase mortgage-backed securities for their own investment portfolios.
Federal Takeover of Fannie Mae and Freddie Mac
Pursuant to authority granted under the Housing and Economic Recovery Act and the Safety and Soundness Act, in September of 2008, Fannie Mae and Freddie Mac were placed into conservatorships overseen by the Federal Housing Finance Agency. (A conservatorship is the legal process in which a person or entity is appointed to establish control and oversight of a company to put it in a sound and solvent condition.)
The conservatorship came about in response to the mortgage crisis, which also included such incidents as the robo-signing scandal. (Learn more in Nolo’s article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners.)
The Federal Housing Finance Agency regulates and supervises Fannie Mae and Freddie Mac. (Learn more about the Federal Housing Finance Agency at www.fhfa.gov.) It’s key authorities include:
- ensuring that Fannie Mae and Freddie Mac operate in a safe and sound manner (including maintenance of adequate capital and internal controls)
- reviewing and approving GSE executive compensation
- establishing risk-based capital requirements, and
- establishing criteria for investments that Fannie Mae and Freddie Mac may hold in their portfolios.