Did you know that the United States government helps regulate mortgage funds? By implementing Fannie Mae in 1938 and Freddie Mac in 1970, the government can support banks and other lenders by providing reliable mortgage funds.
While you may not come into direct contact with these entities, they are both big reasons why you’re able to get funds for your loans from home mortgage companies. They also affect mortgage interest rates and more.
To learn more about Fannie Mac and Freddie Mac and how they affect your mortgage loans, we created this handy guide for you.
Who/What Are Fannie Mae and Freddie Mac?
Both Fannie Mae and Freddie Mac are government-sponsored entities (GSEs). They link banks and other lenders to the federal government and private investors.
Both GSEs help provides liquid funds to lenders that help people get mortgages throughout the United States.
To do this, Fannie Mae and Freddie Mac purchase mortgage loans as investments. They then either hold them or put them into mortgage-backed securities that they can sell to investors. The selling of mortgage-back securities happens on what is known as the secondary mortgage market.
What’s the Difference Between Fannie Mae and Freddie Mac?
While Fannie Mae and Freddie Mac have the same general goal, they came about at different times with different plans in mind. The United States government commissioned each one to work on regulating mortgages in different ways.
Both are still in effect today.
Who/What is Fannie Mae?
Fannie Mae is also known as the Federal National Mortgage Association (FNMA). Others refer to it as simply Fannie.
The United States government created this program in 1938 as a part of the New Deal under President Franklin D. Roosevelt. At that time, Fannie Mae bought mortgages from private companies that didn’t have liquidated cash. This freed up capital so that people would be more willing to lend money during the Great Depression.
In 1968, Fannie Mae was semi-privatized.
Today, Fannie Mae works to make mortgages more affordable for low-income and middle-income buyers. It does this by buying loans from lenders of all sizes.
Who/What is Freddie Mac?
In 1970, the federal government created Freddie Mac, which is also known as the Federal Home Loan Mortgage Corporation (FHLMC) or Freddie. Freddie Mac came along to make even more mortgages available for consumers.
Over time, Freddie Mac also became semi-privatized. As such, Freddie Mac became Fannie Mae’s competition.
Freddie Mac is able to make mortgages available by bundling them together and selling them as investments. Just like those investments for Fannie Mae, the investments from Freddie Mac sell on the secondary mortgage market.
All of this bundling and selling makes it easier for buyers to get the mortgages that they want. That’s because the lenders don’t have to keep the loans on their balance sheets. So, they have more capital to keep lending money to other buyers who want mortgage loans.
What is the Secondary Mortgage Market and How Does it Work?
Both Fannie Mae and Freddie Mac operate on the secondary mortgage market. Before hearing about these two programs, it’s likely that you weren’t even aware of the secondary market’s existence. If you want to know how the secondary mortgage market works, you have to start from the beginning of the loan process.
First, a consumer has to get a loan from a lender in the United States. It can come from a large, national bank or a small, local union. If that lender works with Fannie Mae or Freddie Mac, then one of these programs can buy the mortgage loan once it’s finalized.
The buyer has to meet the guidelines of the lender and the program that the lender works with. After the lender buys the mortgage from the lender, the lender can free up more capital to give out more loans to others who want mortgages.
Fannie Mae or Freddie Mac will do one of two things from there:
- The program will keep the loan
- The program will bundle the loan with similar loans to make a security
If Fannie Mae or Freddie Mac bundles loans, they’re going to locate loans that have similar terms, such as the same interest rate or length of time. These bundles offer investments of all sizes and risks for different investors that want to buy into these mortgages and securities. Since bundles include multiple investors, each investor carries less risk with the investment.
These programs also offer insurance to back up these investments so that investors get protection against potential losses.
How Do I Benefit from Fannie Mae and Freddie Mac?
As a consumer, you may not come into direct contact with Fannie Mae and Freddie Mac, but each program affects you by coming into contact with the lenders in your area.
The most notable benefit is that consumers get lower and more secure interest rates and fees. Without Fannie Mae and Freddie Mac, the origination payments for loans would be more expensive, driving these kinds of costs higher.
Fannie Mae and Freddie Mac also make it easier for lenders to make more customizable mortgage loans. In turn, low-income and moderate-income families have access to affordable loan options. Because Fannie Mae and Freddie Mac buy a specific amount of these loans, lenders are more likely to offer loans to them.
Lastly, these programs also help educate potential buyers about the options that they have regarding mortgage loans. Whether you’re a first-time buyer or a seasoned buyer, you’re able to get more access to mortgage loans and information.
Get in Contact with Home Mortgage Companies
Fannie Mae and Freddie Mac are instrumental parts of the mortgage loan process. Without both programs, far fewer people would be able to afford homes. Plus, fewer lenders would be able to give money to buyers.
If you’re ready to get into contact with one of the home mortgage companies that’s backed by Fannie Mae and Freddie Mac, apply for a mortgage with our team here at Compass Mortgage. We can help you find the terms and conditions that you want in a mortgage.