If you have ever purchased a home, you have likely heard the names Fannie Mae and Freddie Mac mentioned several times. These two names are some of the most important in the real estate world, but have you ever wondered what the meaning is behind these names that have shaped the housing market in such a manner? These government-sponsored entities with the familiar but funny names play a critical role in our nation’s housing market, wielding heavy influence on everything from mortgage interest rates to the overall availability of home loans. Fannie Mae and Freddie Mac are two of the largest financial institutions in the world, and are responsible for a combined $5 trillion in mortgage assets.
How Fannie Mae and Freddie Mac Started
Fannie Mae and Freddie Mac are programs that were created by Congress, and as it turns out, the names are merely nicknames rather than references to actual people. Fannie Mae was established in 1938 and was originally known as the Federal National Mortgage Association. Fannie Mae was originally established combat the lack of affordable housing available during the Great Depression. It helped provide continuous and steady funding for housing and introduced a new type of mortgage to the market that the United States was previously unfamiliar with – the long-term, fixed-rate loan with an option to refinance the loan at any time. The full name for Freddie Mac, is the Federal Home Loan Mortgage Corporation, but it was established much later, in 1970. Freddie Mac was created under the Emergency Home Finance Act with the purpose of expanding the secondary mortgage market and to reduce interest rate risk for banks.
The main purpose of both programs is buying mortgages from lenders, which they either hold onto themselves, or package into mortgage-backed securities (MBS) that they then sell. The money they make from selling these mortgages is used for additional lending. This process of buying and selling ensures a stable supply of mortgage money and increases liquidity in the secondary mortgage market, which in turn helps bring down the interest rates paid by borrowers.
How Fannie Mae and Freddie Mac Affect the Housing Market
It’s impossible to overstate the impact that Fannie Mae and Freddie Mac have on our nation’s housing market. Based on 2023 numbers, these two programs support around 70% of the United States mortgage market. This is already a large number, but it’s even more impressive when you take into account the fact that that neither of these entities originates or directly provides mortgages to homebuyers. Instead, they merely purchase loans from mortgage lenders in the secondary mortgage market. The Fannie Mae program tends to buy loans from larger commercial banks. Meanwhile the Freddie Mac program usually buys loans from smaller banks. If you are wondering why both programs are needed, it’s good to keep in mind that each of these entities have slightly different requirements and preferences when it comes to the mortgages they purchase. While the type of loans they purchase may differ, both Freddie Mac and Fannie Mae sponsor different loan programs that expand homeownership opportunities that have lower down payment requirements.
Freddie Mac and Fannie Mae’s practice of purchasing mortgage loans is beneficial to mortgage markets for two main reasons. First, these purchases help make sure that both home buyers and investors who purchase property have a steady and stable supply of mortgage money. Many lenders who originate mortgage loans would not be able to continue to write these loans without the knowledge that they will be able to sell them to Fannie Mae and Freddie Mac later. Additionally, Fannie Mae and Freddie Mac expand the pool of funds available for housing by attracting new secondary mortgage market investors. these investors are the ones who often purchase packaged mortgage-backed securities. This makes secondary mortgage markets more liquid and lowers interest rates paid by mortgage borrowers.
Fannie Mae and Freddie Mac and Their Effect on the Economy
Fannie Mae and Freddie Mac have a significant impact on the economy. By providing liquidity to the nation’s mortgage finance system, they help stabilize mortgage markets during extraordinary periods when stress threatens the economy. They also support affordable housing, which reduces borrowing costs for many Americans. However, their role in the economy is not without controversy. Both entities backed or owned numerous subprime mortgages during the Great Recession, leading to bailouts and the Federal Housing Finance Agency (FHFA) taking them into conservatorship. Despite these challenges, both Fannie Mae and Freddie Mac continue to play a vital role in maintaining stability in the housing market.
Fannie Mae and Freddie Mac Drama
Just because Fannie Mae and Freddie Mac have a history of stabilizing the United States housing and mortgage markets, that doesn’t mean the programs have been immune from drama. They even found themselves at the center of controversy during the 2008 financial crisis. At the time, both Fannie Mae and Freddie Mac were heavily involved in the subprime mortgage market. This term refers to a segment of the financing business that involves loans made to people or businesses who pose a greater risk of default due to their poor credit history or limited resources. To put it simply, subprime means below prime or less than ideal. In 2008 when this segment of the market crashed, it led to significant losses which ultimately required a government bailout of the Fannie Mae and Freddie Mac programs. In response to these challenges and the upheaval in the real estate market, the United States government decided to place Fannie Mae and Freddie Mac into conservatorship under the Federal Housing Finance Agency (FHFA). This important move helped stabilize the housing market, but it also sparked debates about the role of these entities and their impact on the economy. Since the beginning of the conservatorship, the two entities have required roughly $150 billion in taxpayer support to stay solvent.
Did Fannie Mae and Freddie Mac Cause the Housing Crisis?
Ever since the crash of 2008, one hotly debate point of contention among real estate industry experts is whether or not Fannie Mae and Freddie Mac were partly responsible for the housing bubble and its ultimate 2008 burst. It is true that these entities pumped more and more money into the US home finance system in the years leading up to the 2008 financial crisis. They did this by buying an outsized number of mortgages on the secondary market, which helped support the bubble in home prices that emerged in 2005 through 2007. Coupled with lax oversight and financial engineering at big investment banks, the number of these unsustainable mortgages skyrocketed. This led to many people getting mortgage loans who might not have qualified for home loan financing in earlier normal times. Both homebuyers and the financial system as a whole became overleveraged and unbalanced, driven heavily by financing from Freddie Mac and Fannie Mae.
The Future of Fannie Mae and Freddie Mac
Following the bailout of the programs in 2008, the futures of Fannie Mae and Freddie Mac have been a topic of ongoing debate. Some people argue that these entities should be privatized to reduce the risk of their failures causing unnecessary financial burdens to taxpayers. On the other hand, some experts believe that Fannie Mae and Freddie Mac should continue on in their current form, in order to promote homeownership and stabilize the housing market. Regardless of which path forward is chosen for Fannie Mae and Freddie Mac, it is certain that these two entities will continue to play a significant role in the our nation’s housing market. That’s why a proper understanding of Fannie Mae and Freddie Mac is so crucial as we navigate the complexities of the modern American housing market. However, as we have outlined above, understanding the intricacies of Fannie Mae and Freddie Mac is no easy task.
As we look toward the future of the mortgage loan and real estate industries, Fannie Mae and Freddie Mac will most definitely continue to be influential figures, greatly affecting both markets. Grasping their roles is vital for homebuyers, homeowners, and for anyone who studies the American economy in hopes of predicting the ups and downs. Luckily, both entities are doing much better today than during the housing market crash of 2008, thanks in part to the recent rise in home prices.