Fannie vs Freddie - let’s get it on!
Fannie Mae and Freddie Mac are two entities established by the government to boost the housing market. Fannie Mae stands for the Federal National Mortgage Association. Freddie Mac is the Federal Home Loan Mortgage Corporation.
In 1938, Congress established Fannie Mae through the Federal Home Loan Bank Act. It was a government agency that bought Federal Housing Administration mortgages and included them in its books. President Franklin D. Roosevelt wanted Fannie Mae to help realize the American Dream of homeownership. When Fannie Mae bought the loans from banks, it gave them more money to lend. Fannie then packaged the mortgages into mortgage-backed securities. It sold these derivatives to hedge funds, pension funds, and individual investors. In 1968, Congress transformed Fannie Mae into a company. Congress wanted to stop funding it as an agency. It needed the money to finance the Vietnam War. Instead of using tax dollars to fund it, the government allowed Fannie to sell stocks to shareholders in an initial public offering. That allowed stockholders to own it. But it was also a Government-Sponsored Enterprise.
The U.S. government guaranteed its loans. That turned out to be quite a dangerous arrangement. In 1970, Congress established Freddie Mac.
Like Fannie, Freddie was a GSE that bought mortgages. It freed up bank funds so they could make more mortgages. Unlike Fannie Mae, Freddie Mac could buy any type of mortgage and not just FHA ones. It also focused on buying 30-year mortgages from banks. It also sold its mortgages to the secondary market. Fannie held onto its mortgages.
Together, Fannie and Freddie saved the U.S. housing market. By 2009, Fannie Mae, Freddie Mac, and FHLB provided 90% of the financing for new mortgages.4 This was more than double their share of the mortgage market prior to the 2008 crisis. Private mortgage financing had simply dried up. Fannie and Freddie buy their mortgages from different sources. Fannie buys them from large commercial banks. Freddie buys them from smaller banks.