Definition
Fannie Mae (Federal National Mortgage Association – FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation – FHLMC) are government-sponsored enterprises (GSEs) that help stabilize the housing market by buying mortgages from lenders, packaging them into securities, and selling them to investors. This process provides liquidity to banks and other financial institutions, allowing them to continue issuing new home loans.
Explanation
Fannie Mae and Freddie Mac do not lend money directly to homebuyers. Instead, they purchase mortgages from banks and mortgage lenders, ensuring a steady flow of funds in the housing market. By doing so, they allow lenders to offer affordable mortgage rates and long-term fixed-rate loans, such as the 30-year fixed mortgage that is popular with homebuyers.
While both institutions serve similar purposes, they differ in how they work with lenders:
- Fannie Mae buys loans from larger banks and financial institutions.
- Freddie Mac purchases loans from smaller lenders and credit unions.
Both entities set strict lending guidelines to ensure loans are high-quality and less likely to default. Mortgages that meet these standards are called conforming loans and are generally easier to qualify for and offer lower interest rates than non-conforming loans (such as jumbo loans).
Fannie Mae and Freddie Mac were placed under federal government conservatorship in 2008 after the housing market collapse, ensuring their continued operation to support the mortgage industry.
Example
A homebuyer applies for a 30-year fixed mortgage from a local bank. After the loan is issued, the bank sells the loan to Fannie Mae, which then pools it with other mortgages and sells it to investors. This process allows the bank to free up capital and offer new mortgages to more homebuyers.