If you're looking to buy a home or invest in property, you'll inevitably come across Fannie Mae and Freddie Mac. These two institutions play a crucial role in the U.S. housing market, particularly when it comes to mortgages.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase large quantities of home loans and sell them to investors as mortgage-backed securities in the open market. This keeps money circulating throughout the home mortgage economy, contributing to the growth of homeownership in the United States.
Understanding how these corporations work and their differences is key when starting your mortgage journey, as they can impact your loan options and interest rates.
Fannie Mae and Freddie Mac’s Role in the Mortgage Markets
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) serve pivotal roles in the U.S. mortgage market. They buy loans from mortgage lenders, giving them more funds to issue new mortgages. This process is especially beneficial for the secondary mortgage market because it ensures a constant flow of capital for would-be homebuyers.
Understanding Fannie Mae and Freddie Mac also means recognizing their influence on mortgage rates. By purchasing many loans and setting specific guidelines, they create a benchmark that many lenders follow, impacting interest rates. Their criteria also dictate borrower eligibility and loan requirements, setting the rules for who can get a mortgage and under what conditions. Whether you're a first-time homebuyer exploring new loans or a homeowner considering refinancing, these institutions play a significant role in shaping your options and the costs involved.
What Is Fannie Mae?
Fannie Mae's mission is to make homeownership accessible for as many Americans as possible. While it backs various loan types, including fixed-rate and adjustable-rate mortgages, it also has its own branded Fannie Mae loans. These include the HomeReady loan, designed for low-income buyers, and the Conventional 97, requiring only a 3% down payment.
Another notable program is Fannie Mae HomePath, which offers foreclosed homes at affordable prices. It even provides renovation financing in some cases, making it a great fit if you're looking for a more budget-friendly option. Through these diverse loans and programs, Fannie Mae helps people find affordable housing options that suit their needs.
What Is Freddie Mac?
Freddie Mac aims to make homeownership and rental housing more accessible, like Fannie Mae. It also backs various mortgage types like fixed-rate and adjustable-rate loans. Freddie Mac mortgage rates are often competitive, thanks partly to the volume of loans it buys.
What sets Freddie Mac apart is its focus on innovative programs like the Freddie Mac BorrowSmart Access. This program provides down payment and closing cost assistance to qualified first-time homebuyers or those who haven't owned a home in a while. It's designed to lower your upfront costs when buying a home, making the process more manageable.
Fannie Mae and Freddie Mac Through History
Fannie Mae and Freddie Mac have been significant players in shaping the U.S. housing market for decades. Let's start with Fannie Mae. Created in 1938 at the tail end of the Great Depression, Fannie Mae was the first corporation of its kind aimed at increasing the number of Americans who could afford homes. Fast forward to 1970, and Freddie Mac was established to expand the secondary mortgage market, essentially serving as a companion to Fannie Mae.
While their basic roles are similar, there are key differences. Both entities have weathered significant financial events, notably the 2008 financial crisis, but they've adapted and continue to have a massive influence on housing availability and affordability.
Fannie Mae and Freddie Mac in the 2008 Financial Crisis
Before 2008, Fannie Mae and Freddie Mac were heavily involved in buying risky subprime mortgages, which offered higher returns but came with elevated risks. Both institutions faced massive financial losses when the housing bubble burst, forcing the federal government to step in and take control. This action is known as conservatorship, where the government temporarily took over the management to stabilize the entities and prevent further financial collapse.
What happened to Fannie Mae and Freddie Mac in 2008 became a critical discussion point across the country. It resonated widely because their crisis was pivotal in a broader financial meltdown that affected millions of Americans. Fannie Mae and Freddie Mac are cornerstones of the U.S. housing market, and their struggles had a domino effect. When they faced financial turmoil, it rippled through the entire economy, impacting everyone from homeowners to Wall Street investors.
This situation led to substantial reforms in their operational guidelines. For instance, stricter lending and underwriting practices were implemented to mitigate risks better. Additionally, they shifted focus towards loans with lower risks and more sustainable mortgage practices, moving away from the subprime loans that got them into trouble initially.
The post-crisis era brought heightened scrutiny from both the public and the government. There were calls for greater accountability and tighter regulations to ensure that history wouldn't repeat itself. Legislators and policymakers began designing frameworks to better supervise Fannie Mae and Freddie Mac, including stricter compliance checks and more transparent financial reporting. The 2008 crisis led to lasting changes that still impact how they operate today, aimed at ensuring long-term stability and responsible lending.
Fannie Mae and Freddie Mac in the 2020 COVID-19 Pandemic
During the height of the pandemic, Fannie Mae was proactive in offering mortgage forbearance options to borrowers. It offered structured plans to help people get back on their feet financially without the immediate pressure of mortgage payments looming over them. These options became crucial safety nets for homeowners facing sudden job losses or pay cuts.
In addition to providing forbearance, Fannie Mae and Freddie Mac updated their underwriting guidelines and adjusted their assessment methods. For instance, they looked more holistically at creditworthiness, considering the pandemic's economic fallout. Traditionally, a borrower's credit score, income and debt-to-income ratio are the primary factors that lenders consider. However, given the economic instability brought on by the pandemic, they recognized that many people's financial situations had been temporarily but severely impacted. Instead of solely relying on these standard indicators, they also considered other variables like employment stability, savings or even how a borrower managed financial hardship — like whether they had sought out forbearance plans or restructured existing debts.
Another notable move was their effort to ensure lenders had the necessary liquidity to keep operating. By buying up more mortgages, they provided the cash lenders needed to issue new loans, helping the banks but stabilizing mortgage rates.
The public and governmental view of Fannie Mae and Freddie Mac has been largely favorable during the pandemic. Their quick actions and programs for homeowner relief were seen as vital for market stability. By supporting lenders and borrowers, they helped mitigate the economic shocks that could have worsened the housing crisis during this period.
Mortgage forbearance is a temporary pause or reduction in monthly mortgage payments. Many people faced financial hardship during the pandemic, like job loss or reduced income. Recognizing this, Fannie Mae and Freddie Mac offered forbearance options. Instead of defaulting on your mortgage, forbearance allows you to work out a plan with your lender to catch up on payments later. It's not loan forgiveness — you'll still need to repay the missed payments. But it provides immediate relief and can be a valuable lifeline when money is tight.
Similarities Between Fannie Mae and Freddie Mac
Understanding the similarities between Fannie Mae and Freddie Mac helps you make sense of mortgage options, rates and eligibility criteria and make well-informed decisions for your financial future. Here are some of the most significant factors they have in common:
Enable New Loans: Both institutions enable lenders to write new loans by purchasing these mortgages. This keeps the lending cycle moving, enabling more people to buy homes.
Benefit Secondary Mortgage Market: Fannie Mae and Freddie Mac package these loans into securities and sell them to investors, keeping money flowing through the system and stabilizing mortgage rates.
Influence Mortgage Rates: Both entities have a significant say in setting the benchmark for mortgage rates. When they buy loans, they create demand, influencing the rates that lenders offer.
Set Underwriting Guidelines: Fannie Mae and Freddie Mac have specific criteria for the loans they'll back, affecting everything from your down payment to your credit score requirements.
Back Common Loan Types: Conventional loans are a shared focus, and both provide backing for fixed-rate and adjustable-rate mortgages.
Knowing these shared traits between Fannie Mae and Freddie Mac can help you understand their broad impact on the housing market, equipping you to make more informed decisions when navigating your mortgage options.
Differences Between Fannie Mae and Freddie Mac
While Fannie Mae and Freddie Mac are similar in many ways, they have unique features that set them apart. Knowing these differences can allow you to make smart mortgage choices.
Primarily aims to make homeownership accessible for low-to-middle income households.
Broadens liquidity in the overall mortgage market, including higher-income brackets.
Usually purchases loans directly from lenders.
Often acquires loans through mortgage brokers as well as lenders.
More lenient on debt-to-income ratios and down payments.
Stricter, with higher credit score and lower debt-to-income ratio requirements.
Loan Programs Offered
Fannie Mae HomePath for foreclosed homes, DU Refi Plus for refinancing
Freddie Mac BorrowSmart for down payment assistance, Home Possible loans for low-income borrowers
Nuances in Underwriting
Considers rent history and utility payments in some cases.
More focused on credit score and may require additional financial documents.
Whether you're a homebuyer or an investor, understanding the difference between Fannie Mae and Freddie Mac enables you to tailor your approach and maximize your opportunities in the housing market.
Strategies for Borrowers
Here are some actionable tips on how you can use your knowledge of Fannie Mae and Freddie Mac when dealing with mortgage lenders or looking for the best loan options:
Meeting Income Limits: Both Fannie Mae and Freddie Mac have income limits for certain loan programs, but there are creative yet legitimate ways to meet these. Consider pooling family income or exploring down payment assistance programs that work in tandem with these institutions.
Getting Favorable Rates: Your credit score impacts your mortgage rate, but so do Fannie Mae and Freddie Mac. Keep tabs on the general direction of mortgage rates and consider locking in a rate when they are low. Freddie Mac and Fannie Mae regularly post rate updates, so use those as indicators.
Choosing a Lender: Fannie Mae might be a better fit if you have a lower income and can benefit from more lenient lending requirements. In contrast, Freddie Mac might offer you more favorable terms if you have a strong credit score and can meet stricter lending criteria.
Stay Informed: Both organizations periodically update their lending guidelines. Make it a habit to check their official websites or subscribe to mortgage industry newsletters for the latest changes.
Knowing how Fannie Mae and Freddie Mac work can be vital to your decision-making process. Use this information to your advantage and confidently step into homebuying or refinancing.
The following insights will help you delve into the differences between Fannie Mae and Freddie Mac and may lead you to more informed decisions for your financial future.
About Christopher Boston
- Fannie Mae. "97% Loan to Value Options." Accessed October 6, 2023.
- Fannie Mae. "Comparison of Fannie Mae’s High Loan-to-Value (LTV) Refinance Option to Fannie Mae’s DU Refi Plus and Refi Plus, including HARP®." Accessed October 6, 2023.
- Fannie Mae. "HomePath by Fannie Mae." Accessed October 6, 2023.
- Fannie Mae. "HomeReady Mortgage." Accessed October 6, 2023.
- Freddie Mac. "Freddie Mac BorrowSmart Access℠ Income and Property Eligibility Tool." Accessed October 6, 2023.
- Freddie Mac. "Home Possible." Accessed October 6, 2023.