Fannie Mae vs. Freddie Mac

Fannie Mae
Freddie Mac

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) — i.e., private companies sponsored by the government — in the U.S. home mortgage industry. Though separate companies that compete with one another, they have the same business model, wherein they buy mortgages on the secondary mortgage market, pool those loans together, and then sell them to investors as mortgage-backed securities in the open market. The main difference between Fannie and Freddie comes down to who they buy mortgages from: Fannie Mae mostly buys mortgage loans from commercial banks, while Freddie Mac mostly buys them from smaller banks that are often called "thrift" banks. The two companies are part of a complex process that keeps money moving through the U.S. housing economy, allowing more people to afford to buy homes than would otherwise be able if Fannie and Freddie did not exist. Since the 2008 financial crisis, when the U.S. government bailed out Fannie and Freddie, the government has had a more direct say in these two businesses.

Comparison chart

Edit this comparison chart

Fannie Mae

User Rating (52):

Freddie Mac

User Rating (49):
About A U.S. government-sponsored enterprise that is in the home mortgage loan business. Buys mortgages — mainly from commercial banks — and sells them as mortgage-backed securities / agency bonds. A U.S. government-sponsored enterprise that is in the home mortgage loan business. Buys mortgages — mainly from smaller "thrift" banks — and sells them as mortgage-backed securities / agency bonds.
Name Comes from FNMA acronym, which stands for Federal National Mortgage Association. Comes from FHLMC acronym, which stands for Federal Home Loan Mortgage Corporation.
Founded 1938 1970
Headquarters Washington, DC McLean, VA
Corporate Status Government-sponsored entity held within a conservatorship of the Federal Housing Finance Agency. Government-sponsored entity held within a conservatorship of the Federal Housing Finance Agency.
Bailout/Stimulus A combined $187.5 billion spent bailing out Fannie Mae and Freddie Mac. Money since repaid in full, with interest and dividend payouts. Fannie Mae is now profitable for taxpayers and the U.S. Treasury. A combined $187.5 billion spent bailing out Fannie Mae and Freddie Mac. Money since repaid in full, with interest and dividend payouts. Freddie Mac is now profitable for taxpayers and the U.S. Treasury.
Revenue $22.9 billion (2012) $80.64 billion (2012)
Net Income $17.2 billion (2012) $10.98 billion (2012)
Total Assets $3.2 trillion (2012) $1.98 trillion (2012)
Total Equity $7.2 billion (2012) $8.83 billion (2012)

Contents: Fannie Mae vs Freddie Mac

edit How Fannie Mae and Freddie Mac Work

"[Fannie Mae and Freddie Mac are] more similar than they are different. We're both in the market to provide affordability. So we only do affordable loans in the U.S. We have a charter mission to provide stability to the mortgage market and we have a charter mission to provide liquidity so that market we just talked about continues to function. Fannie Mae and Freddie Mac compete with each other in the same market. We're both restricted to only be in that market — U.S. mortgages — but we compete with each other." —Daniel Mudd, former CEO and President of Fannie Mae, on The Diane Rehm Show

Banks lend money to people who want to buy a house. These loans, called mortgages, can be significant, as much as $300,000 or more, and borrowers typically have 15 to 30 years to repay them. With so many people needing mortgages, and with such long periods of time passing before these large debts are repaid, banks could run out of money to loan.

This is where Fannie Mae and Freddie Mac come in. Fannie and Freddie work with lenders, not borrowers. They buy mortgages from banks, which allows the banks to turn a quick profit and gives them the capital necessary to lend again. In general, Fannie buys mortgages from private commercial banks, like Chase and Bank of America, and Freddie buys mortgages from smaller banks, a.k.a., thrifts.

Mortgage debt that Fannie and Freddie buy is then sold to investors as mortgage-backed securities (MBS), often in the form of agency bonds. (Because they are attached to the mortgage market, agency bonds function a little differently from the more common corporate and government bonds, and they often require a minimum investment of $25,000.[1]) Fannie and Freddie guarantee the loans that are bundled into the mortgage-backed securities they sell to investors. In other words, if a borrower defaults on the mortgage, Fannie or Freddie will pay the investor (the ultimate owner of the mortgage debt) instead of the borrower.

Since Fannie Mae and Freddie Mac are government-sponsored agencies, their guarantee is implicitly backed by the full faith and trust of the United States government. In order for Fannie and Freddie to be able to provide such a guarantee, they require originating banks (the banks that originally lend the money directly to the borrower) to make sure they check the creditworthiness of the borrower. Originating banks have to follow certain rules and guidelines (e.g., at least 20% down payment or the requirement to pay mortgage insurance premiums); documented proof of income and ability to repay; documented appraisal of the home by a professional and neutral third party; and so on. These rules and guidelines are meant to reduce the likelihood of a default on the loan.

When all parts of the whole are functioning as they should, more people are able to afford to buy a home, debts are repaid, and investors make money.

edit Conforming vs. Non-Conforming Loans

Fannie Mae and Freddie Mac directly affect conventional lending for home buying. When dealing with conventional loans, there are two main kinds: conforming and non-conforming. Conforming loans are also sometimes called "qualified mortgages," or QM.

Conforming loans are those which adhere to Fannie and Freddie's guidelines. That is, conforming conventional loans only go to those borrowers who are most likely to pay back their loans — i.e., those who make 20% down payments, have a good credit score, a reliable income, etc. They also do not exceed a certain amount: $417,000, in most cases. A non-conforming loan is a loan that a bank makes that does not adhere to Fannie and Freddie's guidelines. The loan is either made to less creditworthy borrowers or for a larger amount than Fannie and Freddie recommend (see jumbo mortgage). Non-conforming loans are usually higher interest loans to make up for the amount of risk inherently involved in the investment of them; non-conforming loans are common when it comes to buying a condo.

As recently as December 2013, a number of large U.S. banks, including Bank of America, Chase, Citigroup, and Wells Fargo, are issuing non-conforming loans to a small percentage of customers.[2] This is a risky investment for the banks and the investors who buy the mortgage debt, as non-conforming loans are not backed by Fannie and Freddie, making any loan defaults costly for investors and, potentially, for the economy at large.

edit Fannie Mae and Freddie Mac vs. Ginnie Mae and FHA Loans

Besides Fannie Mae and Freddie Mac, there is Ginnie Mae. Unlike Fannie and Freddie, Ginnie is wholly owned by the U.S. government as a public entity, and all mortgage-backed securities that it sells to investors are explicitly backed by the U.S. government. In contrast, the securities bought from Fannie and Freddie are implicitly — i.e., implied to be — backed. Historically, investing in Ginnie Mae's bonds is safer than investing in those bought from Fannie Mae and Freddie Mac.[3]

Ginnie Mae is part of the Department of Housing and Urban Development (HUD) and mainly guarantees Veterans Affairs / VA loans and Federal Housing Administration / FHA loans.

edit Bailout Following the Great Recession

The 2009 stimulus bill "bailed out" Fannie and Freddie. Between the two companies, $187.5 billion was used to keep them afloat. They have since returned this amount and then some — $218.7 billion.[4] This means that bailing out Fannie and Freddie has ultimately become profitable for taxpayers and the U.S. Treasury.

edit Historical Timeline

edit Naming

Fannie Mae gets its name from an acronym, FNMA, which stands for Federal National Mortgage Association. Freddie Mac gets its name in the same fashion, though slightly less obviously. It comes from the acronym FHLMC, which is stands for Federal Home Loan Mortgage Corporation. Ginnie Mae's name comes from GNMA, or Government National Mortgage Association.

edit References

Share this comparison:

If you read this far, you should follow us on:

"Fannie Mae vs Freddie Mac." Diffen.com. Diffen LLC, n.d. Web. 22 Oct 2014. < http://www.diffen.com/difference/Fannie_Mae_vs_Freddie_Mac >

Stay informed Related Comparisons
Follow Diffen
Make Diffen Smarter.

Log in to edit comparisons or create new comparisons in your area of expertise!

Sign up »
Top 5 Comparisons Recently Compared

Comments: Fannie Mae vs Freddie Mac

Comments via Facebook

Anonymous comments (3)

February 20, 2013, 3:33pm

It looks like there is no difference. Like at all. Apparently they both do the exact same thing, and compete with each other and were made this way so that neither one would have a monopoly on the housing market. So the only reason that they're two separate entities is to keep them in competition of each other.

— 216.✗.✗.100
0

September 17, 2008, 10:25am

This is a wiki article - so someone needs to write the difference.

— 24.✗.✗.215
0

September 8, 2008, 11:22pm

What is the difference? Looks like both do the same business in the secondary market. That is to generate funds by selling off loans and or purchasing from the primary lenders. Please advide the difference if I have missed. Thank you.

— 69.✗.✗.91
-1

share

Up next

Loan vs. Mortgage