When the housing market comes up in the news, it seems like the names Fannie Mae and/or Freddie Mac always enter in to the conversation. However, no one ever explains who Fannie Mae or Freddie Mac is, just assuming that everyone knows. Most people have no clue. So, here’s a short guide to who Fannie & Freddie are, and why you should (or shouldn’t) care.
The first reason you might care about Fannie Mae or Freddie Mac is because they might own your mortgage! But let’s understand the history first before getting to that…
Fannie Mae is a nickname for the Federal National Mortgage Association. The Federal National Mortgage Association is a strange entity that is sort of half government and half private. It was created a long time ago by the Franklin Roosevelt administration as a “government-sponsored enterprise” that would help banks do more lending by purchasing the mortgages the banks gave to their customers. The United States was in the midst of the Depression at the time, and banks were not necessarily forthcoming when people asked for mortgages. However, once they knew the government was willing to buy that mortgage and take all the risk of repayment while the bank got the upfront profit, they changed their tune.
In the 1960s, the U.S. government officially changed Fannie Mae’s designation, and it became a public company chartered by Congress. Fannie Mae’s basic business was and continues to be buying up mortgages from its lender partners. It then turns around and creates mortgage-backed securities out of these mortgages, meaning it bunches up many mortgages into a financial instrument similar to a stock or bond, and sells these, again just like stocks or bonds. Traditionally, investors have been willing to purchase these mortgage-backed securities because they know Fannie Mae has government backing — even though Fannie Mae is a public company that specifically tells investors that the government is not providing any sort of guarantee on these investments.
Which brings us to the next point: Even though Fannie Mae is a public company, it does answer to the government. And sometimes the government “encourages” Fannie Mae to purchase mortgages that may not be of the highest quality, in the interests of getting more people into home ownership. Well, if you remember the crash of 2008, you remember that unwise mortgage lending was a big part of it. Lenders were giving almost anyone a mortgage, regardless of their credit history, because they knew they could sell the mortgage to Fannie Mae or even roll it into their own mortgage-backed securities. In the end, Fannie Mae ended up holding a lot of mortgages that it may or may not have been willing to purchase if it hadn’t been “encouraged” to help make home loans available to subprime borrowers.
The real estate market crashed, many people couldn’t pay their mortgages, the homes became worth less than the amount of the loans, and some people just walked away, leaving Fannie Mae holding the steaming bag in many cases. In the end, the U.S. government actually took control of Fannie Mae due to its uncertain financial status. Today, while Fannie Mae remains a public company, it also still remains in “conservatorship” to the U.S. government, meaning the government ultimately has final say on everything it does because the U.S. Treasury is backing both Fannie Mae and Freddie Mac with its dollars. Without going too far into things, the government is attempting to change the structure of Fannie and Freddie and spin them back out into quasi-independence, but that may be a while yet.
By the way, we didn’t really talk about Freddie Mac. Freddie is basically the same thing as Fannie, but with a different name. It too was created by the government (in 1970), and it was created specifically to compete with Fannie and provide even more liquidity to the mortgage markets. Freddie Mac’s “real” name is the Federal Home Loan Mortgage Corporation.
The bottom line to all of this is that Fannie Mae or Freddie Mac may own your mortgage. But even that is not so interesting. It is really Fannie & Freddie’s status as a government-sponsored entity that makes it interesting to the financial news media, because the health of Fannie and Freddie is an indicator of the health of the market as a whole.