Fannie Mae And Freddie Mac: Partners Or Rivals?

Fannie Mae and Freddie Mac are government-sponsored enterprises that play a major role in the secondary mortgage market. They buy loans from mortgage lenders that meet their criteria for loan size, loan-to-value ratio, debt-to-income ratio, and borrower credit score. These loans are then either kept or repackaged as mortgage-backed securities and sold to investors. By providing liquidity and stability to the mortgage market, they make homeownership more accessible and affordable for Americans. While they do not directly provide mortgages to homebuyers, their influence on lending decisions and impact on mortgage rates is significant.

Fannie Mae and Freddie Mac's role in the secondary mortgage market

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that play a major role in the secondary mortgage market. They do not directly provide mortgages to homebuyers but buy residential mortgages on the secondary market. They either keep these mortgages or bundle and sell them as mortgage-backed securities (MBS) to investors, which include large institutional buyers such as pension funds and insurance companies. This process is known as securitization.

By acting as a constant buyer, they ensure liquidity in the lending world by providing banks and mortgage companies with ready access to funds on reasonable terms. They also influence interest rates and the availability of mortgages. In 2025, Fannie Mae and Freddie Mac supported around 70% of the mortgage market, according to the National Association of Realtors.

Fannie Mae, or the Federal National Mortgage Association, was created by Congress in 1938 to help ensure a reliable and affordable supply of mortgage funds throughout the country. Freddie Mac, short for the Federal Home Loan Mortgage Corporation, was established by the Emergency Home Finance Act of 1970 to achieve similar goals. Both enterprises have been under the conservatorship of the Federal Housing Finance Agency (FHFA) since 2008. They are regulated by the Department of Housing and Urban Development (HUD), which requires them to meet annual mortgage purchase goals and dedicate a portion of their loans to low- and moderate-income borrowers.

The impact of Fannie Mae and Freddie Mac on mortgage rates

Fannie Mae and Freddie Mac are government-sponsored enterprises that play a pivotal role in the secondary mortgage market. They buy loans from mortgage lenders, either keeping them or repackaging them as mortgage-backed securities to be sold to investors. By acting as a constant buyer, they ensure liquidity in the lending world, which adds stability and affordability to the mortgage market.

Fannie Mae and Freddie Mac were created by Congress in 1938 and 1970, respectively, with the goal of making homeownership more accessible. They do not directly provide mortgages to homebuyers but set criteria for loans, which must meet specific standards for loan size, loan-to-value ratio, debt-to-income ratio, and borrower credit score. These are known as conforming loans. By purchasing mortgages, they create a system where mortgage lenders have enough capital to continue offering financing to borrowers. This, in turn, helps to keep mortgage rates stable and accessible for homebuyers.

In addition to their impact on mortgage rates, Fannie Mae and Freddie Mac also played a significant role during the 2008 financial crisis, leading to a government bailout and conservatorship. They have also taken measures to support homeowners and renters during the COVID-19 pandemic, impacting their financial health.

The potential impact of privatizing Fannie Mae and Freddie Mac is a topic of discussion among experts. Some argue that mortgage rates could climb higher if the transition is not handled well, while others believe that the end of conservatorship could bring more risk for investors in mortgage-backed securities or the companies' secured debt.

The history of Fannie Mae and Freddie Mac

The Federal National Mortgage Association, or Fannie Mae, was created by the US government in 1938 during the Great Depression as part of the New Deal. Its purpose was to create a more reliable source of funding for banks, making homeownership more accessible to Americans. Fannie Mae was first chartered by the US government to ensure a reliable and affordable supply of mortgage funds throughout the country. Today, it is a shareholder-owned company that operates under a congressional charter.

Freddie Mac, short for the Federal Home Loan Mortgage Corporation, was established by an act of Congress in 1970. It was created with a similar purpose to Fannie Mae: to ensure that there were reliable and affordable mortgage funds available across the nation. Freddie Mac was also chartered by Congress as a private company and is now a shareholder-owned enterprise operating under a congressional charter.

Fannie Mae and Freddie Mac are both government-sponsored enterprises (GSEs) that play a pivotal role in the secondary mortgage market. They buy residential mortgages, either keeping them or bundling and selling them as mortgage-backed securities (MBS) to investors. This process provides liquidity to the mortgage market, ensuring a steady flow of mortgage credit and influencing interest rates and availability.

Fannie Mae and Freddie Mac set criteria for loans, but they do not directly provide mortgages to homebuyers. Instead, homebuyers get loans from mortgage lenders, who can then sell the loan to one of these GSEs if it meets the criteria. As of 2025, these enterprises support around 70% of the mortgage market.

In 2008, during the financial crisis, Fannie Mae and Freddie Mac faced significant challenges and were placed under the direct supervision of the federal government and the conservatorship of the Federal Housing Finance Agency (FHFA). They have since continued to play essential roles in stabilising the mortgage market and supporting affordable housing.

The influence of the US government on Fannie Mae and Freddie Mac

The US government has had a significant influence on the operations and structure of Fannie Mae and Freddie Mac. Both entities were created by Congress with the goal of stabilising and improving the affordability of the mortgage market. They do not directly provide mortgages to homebuyers but buy loans from mortgage lenders, giving those institutions more capital to finance other borrowers. This process is known as securitisation.

Fannie Mae, or the Federal National Mortgage Association, was established in 1938 to create a more reliable source of funding for banks and make homeownership more accessible. It was chartered as a government agency and became a private entity in 1968.

Freddie Mac, short for the Federal Home Loan Mortgage Corporation, was created by Congress in 1970 to ensure reliable and affordable mortgage funds were available across the country. It was established as a private company.

Both entities are government-sponsored enterprises (GSEs) and have ties to the US federal government, which provides a financial backstop. The President of the United States appoints five of the 18 members of the organisations' boards of directors. The US Treasury can also buy up to $2.25 billion of securities from each company to support its liquidity.

In September 2008, during the global financial crisis, the Federal Housing Finance Agency (FHFA) took over Fannie Mae and Freddie Mac, placing them under direct government supervision. The US Treasury extended $100 billion lines of credit to each entity to keep them afloat.

In 2019, the government ended the sweep of profits from Fannie Mae and Freddie Mac, allowing them to return to the private market. However, without explicit or implicit government support, mortgage rates could rise.

Fannie Mae and Freddie Mac continue to be influenced by interest rates, inflation, and other economic and regulatory factors. They are subject to regulation by the Department of Housing and Urban Development (HUD) and the FHFA, which sets annual mortgage purchase goals and dedicates a portion of their loans to low- and moderate-income borrowers.

The potential privatisation of Fannie Mae and Freddie Mac

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been under a conservatorship with the Federal Housing Finance Agency (FHFA) since 2008. During this time, profits from the two GSEs have been funnelled into the treasury instead of private investors. Now, there is potential for the government to sell its shares in the enterprises, releasing them into the private sector.

Fannie Mae and Freddie Mac were created by Congress to ensure a reliable and affordable supply of mortgage funds throughout the country, making homeownership more accessible. They do not directly provide mortgages to homebuyers but instead buy existing home loans from mortgage lenders, either keeping them or selling them as mortgage-backed securities to investors. This creates a system where mortgage lenders have enough capital to continue offering loans.

Advocates of privatisation believe that this was the original intention of the enterprises, which have been private companies operating under a congressional charter. They suggest that privatisation would allow Fannie and Freddie to merge with other primary mortgage actors, expanding their activities and creating efficiency gains.

However, opponents of privatisation worry that it will lead to higher mortgage rates, reduced support for affordable housing, and an increase in market volatility. Mark Zandi, chief economist at Moody's Analytics, agrees that mortgage rates will likely increase, stating that "it's just a question of how much higher". He also predicts that the end of the conservatorship will bring more risk, which will demand a higher interest rate to compensate.

Frequently asked questions