As you look into getting a mortgage, you’ll probably hear about two names: Fannie Mae and Freddie Mac. They are the two major government-sponsored enterprises (GSEs) although they are private entities operating under a Congressional charter. The have standard criteria and loan requirements every mortgage applicant must meet to get a loan.
Even though you don’t directly get a home loan from them, they still matter when it comes to your mortgage and how it works. They’re like important players in the mortgage world. Come closer let’s take a clear picture of who they are and what makes them special.
What are Fannie Mae and Freddie Mac?
Back in 1938, when the country was going through a really tough time referred to as the “Great Depression”, the US government made a group called Fannie Mae, which stands for the Federal National Mortgage Association. This was meant to help banks get more dependable money to lend out for people who wanted to buy homes. It was like opening doors for more folks to become homeowners, both in a real and a figurative way.
Then, in 1970, there was another group created by the US government known as Freddie Mac. That’s short form for the Federal Home Loan Mortgage Corporation. It was kind of like Fannie Mae and had a similar goal. Both Fannie Mae and Freddie Mac now work under the watch of a the Federal Housing Finance Agency (FHFA).
Roles of Fannie Mae and Freddie Mac in Mortgage Market
Both Fannie Mae and Freddie Mac play big roles in something called the “secondary mortgage market.” That’s a place where they buy loans from banks and other lenders. This gives those lenders more money to help more people get home loans. Then, Fannie and Freddie might either keep those loans or package them up into special bundles called “mortgage-backed securities” and sell them to people who want to invest.
By doing this, they make sure there’s always enough money flowing in the lending world. In 2023, Fannie Mae and Freddie Mac are behind about 70% of the mortgage market, says the National Association of Realtors. That means most regular loans (called conventional loans) from private lenders get support from these two groups.
But, remember, Fannie Mae and Freddie Mac don’t actually give you a mortgage. Instead, you get your mortgage from a bank, credit union, or online lender. Then, that lender might decide to sell your loan to Fannie Mae or Freddie Mac, if it meets the right conditions.
Fannie and Freddie in the 21st century
Both Fannie Mae and Freddie Mac had a part in the tough times of the Great Recession. Before the housing market went bad, they were connected to a lot of subprime mortgages. Then, when the housing market got really messed up, they had a hard time and lost a bunch of money. The government had to step in and give them money to help out. Even though they got into more debt, they paid back most of the money later on.
When COVID-19 happened, Fannie Mae and Freddie Mac helped out homeowners during the tough times. They offered things like help with mortgage payments, changing loan plans, and stopping foreclosures and evictions for a while.
Importance and Examples of Fannie Mae and Freddie Mac
Below are some examples to help you understand what Fannie and Freddie:
- Great Recession Example: Imagine a time when many people were buying houses, and Fannie Mae and Freddie Mac were helping by supporting loans. But then, something bad happened, and the housing market crashed. Many people couldn’t afford their homes anymore, and the loans that Fannie Mae and Freddie Mac had backed weren’t getting paid back. This made them lose a lot of money, and they needed help from the government to stay afloat. The government gave them money to recover, like a financial lifeline.
- COVID-19 Pandemic Example: During the COVID-19 pandemic, a lot of people lost their jobs and had trouble paying their mortgages. Fannie Mae and Freddie Mac understood this and wanted to help. They offered programs to homeowners, like a pause button on mortgage payments (forbearance), changing the terms of loans, and even stopping the process of taking away homes (foreclosure) and kicking people out (eviction) for a while. This helped homeowners who were struggling because of the pandemic.
Think of Fannie Mae and Freddie Mac as financial helpers who step in during tough times to support homeowners and the housing market.
What is the difference between Fannie Mae vs Freddie Mac?
The difference between Fannie Mae and Freddie Mac which are the two major government-sponsored enterprises operating under a Congressional charter. Though both are currently under a conservator-ship by the same agency – the FHFA – the two entities are separate from one another, each with their own shareholders and leadership. Let me explain further;
1. Where They Started:
Fannie Mae and Freddie Mac were born at different times and for different reasons. Fannie Mae came into existence a long time ago, while Freddie Mac was created later. They have unique stories behind their beginnings.
2. Current Status:
Even though they both fall under the care of the same agency, the FHFA, Fannie Mae and Freddie Mac are still separate entities. They have their own groups of people who own shares in them, and each has its own leadership and way of doing things.
Think of them like two similar but independent companies that work in the same field, with their own histories and ways of operating.
GSE Loan Sourcing and Lending Requirements
Even though both Fannie Mae and Freddie Mac buy mortgages, they get them from different places. Here’s the deal:
Fannie Mae: They usually gets its mortgages from big commercial banks and major lenders. It’s like they go to the big guys to find their loans.
Freddie Mac: But this one likes to get its mortgages from smaller banks. They’re more into working with the local lenders.
Although both of them buy mortgages, Fannie and Freddie have some differences in the types of mortgages they like. They each have their own set of rules for the mortgages they buy. These rules are like guidelines that the mortgage has to follow. It’s kind of like how you have to follow certain rules when you apply for a loan.
Federal Housing Finance Agency (FHFA) Loan Requirements for Freddie and Fannie
No matter which one we’re talking about, the mortgage they buy has to be a certain kind called a “conforming loan.” That means it follows their special rules. It’s like fitting into their mortgage criteria. The rules cover how much of the home’s price you can borrow. They also check your credit score, how much you owe compared to how much you earn – debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and other important things. It’s like a checklist to make sure the mortgage is a good one.
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Fannie Mae and Freddie Mac Loan programs
Fannie Mae and Freddie Mac both support various loan programs. These are like special types of home loans that help people become homeowners, even if they can’t afford a regular down payment. Let’s check them out:
1. Fannie Mae Loan Program:
Fannie Mae has some loan programs, like HFA loans. These are offered by state housing finance agencies. They also have the HomeReady program. This one is offered by certain private lenders.
2. Freddie Mac Loan Program:
Then there’s Freddie Mac, which has a program called HomePossible program. This is also offered by approved private lenders.
These programs are cool because they make it easier for people to buy homes. They only ask for a 3 percent down payment, which is less money upfront. It’s like giving more people a chance to have their own home, even if they don’t have a lot of money saved.
What you can do
Even though you can’t get a mortgage straight from Fannie Mae or Freddie Mac, it’s still important to know about them. They play a big role in the world of mortgages, and here’s why you should care:
1. More Affordable Loans:
Fannie Mae and Freddie Mac help make getting a mortgage easier for many people. They offer loans with smaller down payments, which means you don’t need as much money upfront to buy a home.
2. Competition and Lower Rates:
Because of Freddie and Fannie, different lenders have to compete with each other. This competition can lead to lower interest rates on mortgages. So, you might pay less money over time.
3. Rules and Qualifications:
They also help set the rules for getting a mortgage. This means they influence what you need to do to qualify for a home loan. So, understanding their standards can help you be better prepared when you’re ready to buy a house.
In simple words, Fannie Mae and Freddie make it easier for more people to afford a home, help keep interest rates lower, and set the rules for getting a mortgage. That’s why they matter to you, even if you don’t get a loan directly from them.
Pros and Cons of Fannie Mae and Freddie Mac:
There are se advantages and disadvantages of Fannie and Freddie. Here is a breakdown below:
- More Accessible Homeownership: Fannie and Freddie make it easier for people to buy homes by offering loans with lower down payment requirements. This means you don’t need a huge amount of money upfront.
- Lower Interest Rates: They encourage competition among lenders, which can lead to lower interest rates on mortgages. This can save you money over the life of your loan.
- Standardized Rules: Fannie and Freddie set guidelines for mortgages, helping create clear and consistent standards for borrowing. This can make the mortgage process more predictable and easier to understand.
- Support During Tough Times: During economic challenges like the Great Recession or the COVID-19 pandemic, Fannie and Freddie have provided assistance to homeowners, offering options like forbearance and loan modification programs.
- Limited Flexibility: Their standardized rules might not fit everyone’s unique financial situations. If you don’t meet their requirements, you might have to look elsewhere for a mortgage.
- Bigger Influence: Because they have a significant role in the mortgage market, their decisions and policies can impact the availability of certain loan products, potentially limiting options for some borrowers.
- Market Dependence: Since Fannie and Freddie are major players in the mortgage market, changes in their operations or government policies can have ripple effects on the entire housing and lending industry.
- No Direct Loans: You can’t get a loan directly from Fannie or Freddie. You still have to work through other lenders, which means you have to navigate both the lender’s requirements and those of Fannie Mae or Freddie Mac.
In essence, Fannie and Freddie make homeownership more achievable for many people, but their standardized approach might not work for everyone, and their influence on the market can have both positive and potentially limiting effects.
To find out if you have a Freddie Mac and Fannie Mae backed loan:
- Use the Fannie Mae Loan Lookup tool at https://knowyouroptions.com
- Search the Freddie Mac Loan at https://loanlookup.freddiemac.com
Helpful Mortgage Guide and Overview:
- Minimum Down Payment on a Home Loan
- Refinancing Your Home: The Pros and Cons
- What is Conforming Loans, Rates and Mortgage
- Non-conforming loans rate, Underwriting Guidelines
- Jumbo Loan and Interest Rates: How to Qualify for it
- FHA Loan insured by the Federal Housing Administration
- VA Home Loan Buyer’s Guide, Program Benefits, Eligibility
- USDA Home Loan by United States Department of Agriculture
- Government-backed Mortgage Home Loan for First Time Buyers
- How to Calculate Debt-to-income Ratio for a Mortgage Application