9/27/2022
In the vast universe of US mortgage lending, there are several institutions that shape the real estate market. Among the best known are Fannie Mae and Freddie Mac, two government-backed companies that make buying a home easy. Due to its importance, we have to let you know about its creation and what they do to help you.
Origin and purpose of Fannie Mae
Like the FHA, Fannie Mae emerged during the Great Depression (1938) and was launched by President Franklin D. Roosevelt. Its original name is the Federal National Mortgage Association (FNMA) and arises from the Federal Home Loan Bank Act, with the intention of promoting the possibility that more American citizens have access to a home.
Fannie Mae's main function began with the purchase of mortgages from the largest commercial banks so that they could offer more mortgage loans. In this operation, this agency grouped the debts in the form of mortgage-backed securities. It then proceeded to sell these derivative instruments to investors, pension funds, and hedge funds.
On the other hand, the FNMA does not work as an organization that lends you money to obtain a home, but rather as an intermediary.
Being one of the largest buyers of mortgage loans in the secondary market, it can support and guarantee these mortgages through financial entities that are attached to its services.
Fannie Mae's conversion to a company happened in 1968, as Congress did not want to continue funding it as an agency. Instead of using taxes for their operations, they decided to make a public offer to raise capital through shareholders. Although it is sponsored by the government, its investors own this company.
Origin and purpose of Freddie Mac
Known as FHLMC (Federal Home Loan Mortgage Corp), this government agency was created during the presidency of Richard Nixon, in 1970.
At that time, Congress supported its implementation so that it could compete with the FNMA. The main difference with respect to this one is that Freddie Mac could buy any type of mortgage.
The FHMCL is one of the results of enacting the Emergency Home Finance Act of 1970. The purpose of its application was to expand the secondary market for mortgage loans and, at the same time, reduce risk interest rates for financial entities.
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Eventually, this body would separate from the government to become a GSE (Government Sponsored Enterprise).
Billed as a shareholder-managed financial services corporation, Freddie Mac backs almost 80% of all mortgages in the United States. Like Fannie Mae, its work is not focused on giving you a mortgage loan, but on creating liquidity conditions for banks, credit unions and savings entities.
The scheme for the purchase of mortgages is similar to the FNMA: grouping various loans to later sell them as mortgage-backed securities (MBS).
These instruments work as bonds that generate dividends for those who decide to invest in them. They are not only secured by a pool of mortgages, they are traded on the secondary market and serve to leverage the real estate business.
Differences between the FNMA and the FHLMC
Although these institutions emerged at different times or with different purposes, both fulfill the same function within the real estate market. Since they are GSEs and people have the possibility of buying shares to participate in them, the most relevant differences are not many. Basically they come down to 2:
- Fannie Mae offers the Home Ready Loan, for which applicants cannot have an income greater than 80% of the median for their area of residence. Meanwhile, Freddie Mac puts at your fingertips the Home Possible program, which asks applicants to live in a house and not have a salary higher than the average in the area where they are.
- The FNMA creates the conditions for greater access to credit by buying mortgages from the most important commercial banks. Instead, the FHLMC does so by purchasing these financing commitments from smaller or local entities that have less exposure.
Final considerations
While some believe that Fannie Mae and Freddie Mac were partly responsible for the 2008 crisis, others believe that they are mechanisms that facilitate the acquisition of property in the United States.
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Whatever the case, they are major institutions that can help you get a mortgage with fewer requirements than the larger commercial banks.
When it comes to shopping for home loans, there are many options available if you have a decent credit history and a stable income. There is no doubt that the FNMA and FHMCL are interesting alternatives when your personal finances are not the best.
But if you want other options in the mortgage category, you can find them in the Busconómico mortgage comparator.
Español: Qué son Fannie Mae y Freddie Mac