If you are in the process of investing in a home or a multi-family property, you have most likely come across the terms Freddie Mac and Fannie Mae. These two are key players in the US housing market and help provide liquidity, stability, and affordability. The two are quite similar as they intend to achieve the same goal of ensuring there’s ready access to funds in the housing market.
But when it comes to shopping for a mortgage, the issue of Freddie Mac vs Fannie Mae becomes quite important. Understanding the difference between these two is crucial, and that’s what we’ll focus on today.
What exactly are Freddie Mac and Fannie Mae?
When a bank is lending from its own capital, it can only lend so much. And on top of that, it will typically lend for a short period, say 5 to 10 years, and at higher rates.
Freddie Mac and Fannie Mac help change the scenario by buying mortgages from banks and bundling them together into what are known as mortgage-backed securities (MBS). They can then sell these securities to various investors. By doing this, they create cash flow that banks can now use to offer even more affordable mortgages to everyday people and investors. Both Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs). They however have more official names, with Fannie Mae being the Federal National Mortgage Association (FNMA) and Freddie Mac the Federal Home Loan Mortgage Corporation (FMCC).
Where do Fannie Mae & Freddie Mac Differ?
Freddie Mac and Fannie Mae have several differences.
Origins & Purpose
Fannie Mae was created in 1938, and it was necessitated by the Great Depression. As there were limited resources, the housing market had taken a huge hit and destabilized. Fannie Mae was a tool to buy mortgages from lenders, which would then allow the lender to offer more loans to home buyers and investors. Fannie Mae originally operated as government agency before it became a publicly traded company in 1968.
Freddie Mac was established in 1970, and its main aim was to introduce competition and innovation in the housing finance market. But to do this, it would focus more on smaller institutions that offer mortgages, such as savings and loan associations. Like Fannie Mae it also transitioned to being publicly traded in 1989.
Regulatory Oversight & Charters
Both Fannie Mae and Freddie Mac are regulated by the government, especially after the 2008 financial crisis when it bailed them out. The supervision is quite important even though they are outside investors are involved, as it helps ensure that the organization still serves the greater good of ensuring stability and affordability.
Both Fannie Mae and Freddie Mac are under the supervision of the Federal Housing Finance Agency (FHFA), which oversees and regulates the various activities carried out by the entity. However, each has its own charter that guides it. Fannie Mae’s charter simply focuses on the availability of affordable housing, but Freddie Mac’s has an additional emphasis on providing stability and liquidity in the secondary mortgage market.
Market Focus
One of the most significant differences between Fannie Mae and Freddie is that the two focus on different markets. Fannie Mae mostly buys loans from larger commercial banks, while Freddie Mac buys them from much smaller banks. In addition to conventional loans, Freddie Mac also deals with government-backed loans, such as FHA (Federal Housing Administration) and VA (Veterans Affairs) loans.
Loan Programs
Fannie Mae and Freddie Mac typically deal with different types of borrowers, hence different loan programs. For example, Fannie has the The HomeReady mortgage program, which is meant to help low- to moderate-income borrowers. The program also has the The HomeStyle Renovation mortgage, which allows borrowers to be able to improve their homes while at the same time paying for the purchase.
Freddie Mac also has Home Possible mortgage program, whose target is low- to moderate-income borrowers. There’s also The CHOICERenovation mortgage program which is much like the one offered by Fannie Mae. This shows the differences between the two, although they mostly help achieve the same goals.
