Fannie Mae and Freddie Mac: Cornerstones of the U.S. Housing Finance System

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are pivotal entities in the American housing finance system. Created by Congress, these government-sponsored enterprises (GSEs) ensure liquidity, stability, and affordability in the mortgage market. Let’s delve into their roles, functions, and impact on housing finance.

Key Functions of Fannie Mae and Freddie Mac

1. Providing Liquidity to Mortgage Markets

Fannie Mae and Freddie Mac purchase mortgages from banks, savings institutions, and mortgage companies. By doing so, they provide these lenders with cash, which can then be used to issue new loans. This cycle ensures that lenders have the resources to meet the ongoing demand for home loans.

2. Packaging Mortgages into Mortgage-Backed Securities (MBS)

The GSEs package the purchased mortgages into mortgage-backed securities (MBS), which are sold to investors. By guaranteeing the principal payment and interest on these securities, Fannie Mae and Freddie Mac attract investors who might not traditionally invest in mortgages. This process:

• Expands the pool of funds available for housing.
• Makes the secondary mortgage market more liquid.
• Lowers interest rates for borrowers.

3. Stabilizing the Housing Market

During times of financial turmoil, Fannie Mae and Freddie Mac help stabilize mortgage markets. Their ability to maintain a steady flow of funds ensures that mortgage lending continues, even when broader economic conditions are uncertain.

4. Supporting Affordable Housing

Both entities support lending programs that finance affordable housing. By doing so, they reduce the cost of borrowing for families and individuals, ensuring broader access to homeownership and rental housing opportunities.

Historical Background

Fannie Mae

• Established: 1938
• Purpose: To ensure a reliable and affordable supply of mortgage funds across the country during the Great Depression.
• Evolution: Initially a government agency, it transitioned to a shareholder-owned company operating under a congressional charter.

Freddie Mac

• Established: 1970
• Purpose: To provide competition to Fannie Mae and further enhance liquidity and affordability in the mortgage market.
• Evolution: Like Fannie Mae, Freddie Mac operates as a shareholder-owned company under a congressional charter.

How Fannie Mae and Freddie Mac Impact Borrowers

1. Lower Interest Rates: By expanding the secondary mortgage market and attracting diverse investors, these GSEs help reduce the cost of borrowing for homeowners and multifamily property investors.
2. Increased Loan Availability: Their activities ensure lenders can consistently offer home loans, even during economic downturns.
3. Access to Affordable Housing: Fannie Mae and Freddie Mac support programs designed to make homeownership and rental options more affordable for low- and moderate-income families.

Conclusion

Fannie Mae and Freddie Mac play a vital role in ensuring the health and resilience of the U.S. housing market. Through their ability to provide liquidity, stabilize mortgage markets, and support affordable housing, these GSEs enable millions of families and individuals to achieve homeownership or secure rental housing. While they are shareholder-owned companies today, their congressional charters ensure their operations align with public interest goals, reinforcing their importance in the nation’s housing finance system.