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A Comparative Study on Fannie Mae and Freddie Mac

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What is Freddie Mac and Fannie Mae?


Freddie Mac


Freddie Mac

Government agencies Fannie Mae and Freddie Mac were set up to help the real estate market. The Federal National Mortgage Association is known by the initials Fannie Mae. The Federal Home Loan Mortgage Corporation is Freddie Mac.

These organizations differ not only in terms of their origins but also in terms of their target market and available goods. For instance, Freddie Mac purchases foreclosures from smaller thrift institutions whereas Fannie Mae purchases them from big retail banks. But both assist banks in increasing loan volume and lowering interest rates.

What do Freddie Mac and Fannie Mae do?

The following obligations apply to both organizations:

  • Keep the secondary market for home mortgages stable

  • Adapt your responses to the private capital market

  • Increase the stability of mortgage assets and make more money accessible for funding residential mortgages to provide continued assistance to the secondhand market for home loans.

  • By having more funds available for residential mortgage funding and boosting the stability of mortgage investments, you can increase access to mortgage credit.

Mortgage Backed Securities

A mortgage-backed securities (MBS) is an asset that resembles a bond and is composed of a collection of mortgages that have been acquired from the banks that originated them. Periodic payouts akin to bond coupon payments are made to MBS investors.

For example, a bank that offers home mortgages would round up mortgages totaling $10 million. The pool is subsequently sold to a securities company, a treasury enterprise (GSE) like Fannie Mae or Freddie Mac, or a national government body like Ginnie Mae so that it can be used as security for new MBS.

Bailout of Fannie Mae and Freddie Mac


Fannie Mae


Fannie Mae

On September 6, 2008, Fannie Mae and Freddie Mac were bailed out. The rescue occurred at the same time as the U.S. The Treasury Department received permission to buy preferred shares and mortgage-backed securities from the organizations for up to 100 billion dollars. As a result, the Federal Housing Finance Agency placed Fannie and Freddie under conservatorship (FHFA).

The 1989 Savings and Loan Crisis, which cost the taxpayers 132 billion dollars, paled in comparison to the bailout of Fannie and Freddie. The shares of Fannie Mae and Freddie Mac fell as a result of concerns on Wall Street that the loans might default. Private businesses were unable to raise the additional funds required to pay the mortgages. Most people are unaware that the bailout from July also included:

  • CDBG funds totaling 3.92 billion dollars will assist homeowners in underserved areas.

  • a decision to authorize the Treasury Department to purchase shares of Fannie Mae and Freddie Mac in order to support current stock prices and enable the two companies to continue raising money on the private market.

  • approving the Federal Housing Administration's request to insure $300 billion in new loans in order to prevent the bankruptcy of 400,000 homeowners.

  • Massive tax breaks on homes, including a credit of up to 7,500 dollars for first-time purchasers.

  • a rise of 800 billion dollars, or 10.6 trillion dollars, in the legal ceiling on the national debt.

  • a new regulatory body that will be in charge of monitoring executive compensation at Fannie and Freddie.

Fannie Mae Vs Freddie Mac

Although Freddie Mac and Fannie Mae are both mortgage companies, they differ significantly in a number of important ways. Let's look more closely.


Legal Services India


Legal Services India

  • Purchase of Mortgages - Where Freddie Mac and Fannie Mae get their mortgages is the main distinction between them. While Freddie Mac purchases mortgages from many private institutions, Fannie Mae purchases them from larger financial institutions.

  • Intended Goal - Fannie Mae and Freddie Mac were both founded with distinct goals, as you may recall from the histories of both companies. Fannie Mae was the first company Congress established in order to make housing and money more accessible. As an option, Freddie Mac was founded as a public company to help grow the secondary mortgage market.

  • Approval Procedures - The majority of loans guaranteed by Fannie Mae and Freddie Mac are conventional lending, which are not government-insured. Despite being considered to be "conventional" or "conforming" loans, the companies have different policies.

  • Lending Conditions - Lending standards vary between Fannie Mae and Freddie Mac. Both companies have different policies regarding low or minimum down payments when it comes to their mortgage programmes.

  • Mortgage Programs - The programmes that the two government-sponsored businesses provide vary as well. The HomeReady loan is provided by Fannie Mae, and applicants are not permitted to earn more than 80% of the median income in the area. The Home Possible loan from Freddie Mac has a requirement that applicants cannot earn more than the average salary in the area.

Freddie Mac as a Case Study

One of the government-sponsored businesses, Freddie Mac, delayed disclosing its profits because of an accounting controversy that forced it to restate its profits in November for the years 2000 through 2002, which it had previously overstated by 5 billion dollars. In order to give itself time to reconstruct its accounting, the corporation postponed publishing financial reports after 2002 and committed to release the 2003 earnings report by 30 June. By June 30, it pledged to release 2003 financial results.

According to Freddie Mac, the company made 4.89 billion dollars last year, down from 10.09 billion dollars in 2002, and forecasted a profit of 5.90 dollars per share for 2003. Reflecting the effects of the 5 billion dollars restatement because management disregarded the laws of accounting to obfuscate earnings.

Conclusion

Nationally renowned, federally supported mortgage companies Fannie Mae and Freddie Mac are dedicated to supplying the U.S. housing market with flexibility, stability, and accessibility. The nation's home finance system depends on both of these government-sponsored companies, or GSEs, completing this duty. Although Fannie Mae and Freddie Mac are both mortgaged companies, they have a significant difference between each other.

Last updated date: 25th Sep 2023
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FAQs on A Comparative Study on Fannie Mae and Freddie Mac

1. Are there any loans that cannot be sold to Freddie Mac or Fannie Mae?

A mortgage loan is referred to as "conforming" if it qualifies for acquisition by Freddie Mac or Fannie Mae. To fit within that group and be eligible to be sold to Fannie or Freddie, it must satisfy a number of requirements. Nonconforming loans are ones that don't adhere to certain requirements and cannot be sold. Loan rates, credit scores, debt-to-income ratios, repayments, and the types or locations of properties all factor into the requirements.

2. What are the similarities between Freddie Mac and Fannie Mae?

For many years, housing was made accessible to ordinary Americans via Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system. But they operated as organizations supported by the government. The U.S. housing market was preserved by Fannie and Freddie working together. 90% of the capital for brand-new mortgages was provided by Fannie Mae, Freddie Mac, and FHLB by 2009. That was more than twice as much of the mortgage market as they had before the 2008 financial crisis. The Federal Housing Finance Agency currently has conservatorship over both Fannie and Freddie.

3. Does Freddie Mac provide loans to consumers?

Instead of giving loans to homebuyers individually, Freddie Mac purchases packaged mortgages from lenders and other mortgage companies. Banks can increase the number of Americans they lend money to by combining and reselling mortgages to Freddie Mac as assets known as mortgage-backed securities. Buyers do not receive loans directly from Freddie Mac. Our main line of work is buying loans from bankers so they have more money to lend out to other customers in the form of mortgages.