Fannie Mae vs. Freddie Mac: What’s the Difference?

Applying for a Mortgage, How Mortgages Work, Mortgages

If you’re in the middle of shopping for a mortgage (or will be soon), you’ll probably come across two companies: Fannie Mae and Freddie Mac. Ring any bells?

Fannie Mae and Freddie Mac are home mortgage companies created by Congress that play an important role in the U.S. mortgage industry. 

The two federally backed institutions provide stability and liquidity to the mortgage market by buying mortgages from lenders. When Fannie or Freddie buys loans from banks and other lenders, it frees up their cash flow and allows them to offer more mortgage loans to further eligible home buyers.

We can explain the who, what and why of these popular government-sponsored firms and how they are similar and different.

What Are Fannie Mae and Freddie Mac?

Officially, the two federally backed mortgage companies are known as the Federal National Mortgage Association (aka Fannie Mae) and the Federal Home Loan Mortgage Corporation (aka Freddie Mac. Neither company actually lends money to borrowers. Fannie and Freddie are more like mortgage investors. They buy mortgages from banks and other lenders to ensure they have enough capital to offer more loans.

Because Fannie Mae and Freddie Mac are major buyers of mortgages, it’s in a lender’s best interest to ensure borrowers meet the loan requirements set by Fannie and Freddie.

Are Fannie Mae and Freddie Mac Government Agencies?

Even though both organizations are government-sponsored enterprises, they don’t insure government loans. That’s because they’re considered government-sponsored enterprises (GSEs) –  publicly-traded private companies supervised by the federal government through the Federal Housing Finance Agency (FHFA), which is part of the Department of Housing and Urban Development (HUD).

What Do Fannie Mae and Freddie Mac Do?

While you can’t get a loan directly from either of these companies, their influence in the mortgage industry will have a direct impact on borrowers in several ways: 

  • They offer more options for affordable home financing with access to lower down payment requirements for borrowers.
  • They create competition in the market, which helps lead to lower interest rates.
  • They can influence the requirements for a mortgage, making it easier for lower-income or first-time home buyers to buy a home.
  • They buy mortgages from lenders, freeing more capital for them to lend to borrowers.

What is the Difference Between Fannie Mae and Freddie Mac?

The U.S. government oversees both mortgage giants. But the key difference between them is where they buy their mortgages. Fannie Mae buys mortgages from commercial banks and larger lenders. And Freddie Mac generally buys mortgage loans from smaller banks. 

Both Fannie Mae and Freddie Mac offer similar loan programs lenders can offer borrowers. Fannie Mae offers the HomeReady® loan, and Freddie Mac offers the Home Possible® loan. Both programs allow first-time and lower-income home buyers to purchase homes with down payments as low as 3%.[1] [2]

But each has different guidelines to assess a borrower’s creditworthiness, debt-to-income ratio (DTI) and current income. In rare cases, you may get approved for one program and not the other. 

What about Ginnie Mae?

If you’re a first-time or a lower-income home buyer, you may have heard of the Government National Mortgage Association (aka Ginnie Mae). Think of Ginnie Mae as the younger sibling to Fannie Mae and Freddie Mac.

Unlike Fannie and Freddie, Ginnie Mae isn’t a GSE. It’s a government agency that’s part of the Department of Housing and Urban Development (HUD) and secures Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans.

Fannie Mae and Freddie Mac: A Brief History

Congress created Fannie Mae during the Great Depression to stabilize the mortgage market for lenders and home buyers and provide affordable mortgage financing nationwide. The mortgage company paved the way for fixed-rate, long-term mortgages and refinance options, offering increased housing affordability.

Fannie Mae eventually became a private, shareholder-owned company while under government sponsorship. Two years after reorganizing to private ownership in 1968, the federal government authorized Fannie Mae to buy conventional mortgages.[3]

Freddie Mac was created by Congress in 1970 under the Emergency Home Finance Act[3] to help provide additional funds and manage risk for smaller mortgage lenders. Freddie also helped reduce risk in the growing mortgage bond market. Like Fannie Mae, Freddie Mac reorganized into a for-profit corporation in the late 1980s.[3]

The financial crisis of 2008

Between 2007 – 2008, the housing and mortgage markets collapsed, leaving many homeowners with homes worth less than what they owed on their mortgages – leading to a wave of mortgage delinquencies, defaults and foreclosures. As buyers of these mortgages, Fannie Mae and Freddie Mac were both affected by this collapse and became financially distressed.[4]

In September 2008, the Federal Housing Finance Agency put Fannie Mae and Freddie Mac in conservatorship over the deterioration of the housing market that left both companies unable to fulfill their missions.[4] The companies remain under government control today.

The COVID-19 pandemic

During the height of the COVID-19 pandemic, many Americans either lost their jobs or saw their incomes drastically decrease, making it hard to cover their rent or mortgage payments.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27, 2020, in response to the pandemic. Among its many provisions, there were provisions to protect renters and homeowners.[5]

The program protected renters from eviction and allowed homeowners with government-backed mortgages and mortgages secured by Fannie and Freddie to temporarily pause or reduce their mortgage payments. 

Whether It’s Fannie or Freddie, Both Are Government-Backed

Fannie or Freddie are major players on the mortgage industry landscape – even if much of the work is happening behind the scenes. Each company has a direct influence on the mortgage lending process. A process you’ll be quite familiar with when you’re finally ready to apply for a mortgage loan. 

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