Freddie Mac and Fannie Mae: What Happens To Your Mortgage?

If you’re in the market to buy a home and are researching mortgages, you’ve likely heard of Freddie Mac and Fannie Mae. But who are they, why are people talking about them, and how do they affect your loan? We’ll dive deeper into these questions in this article.

Who are Freddie Mac and Fannie Mae?

Freddie and Fannie aren’t people but instead names of government-sponsored enterprises. Freddie Mac and Fannie Mae, also known as the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA), respectively, are government-sponsored enterprises (GSEs) in the United States. They play a significant role in the mortgage industry by providing liquidity and stability to the housing market. Both organizations operate in the secondary mortgage market, which means they don't directly originate mortgages but instead buy and guarantee them from primary lenders.

Fannie Mae and Freddie Mac were created by Congress in 1938 and 1970 respectively with the aim of expanding access to affordable housing. They operate in slightly different ways, but their primary function is to buy mortgages from lenders and package them into mortgage-backed securities (MBS). This process helps lenders free up capital to originate more loans, ensuring a steady flow of mortgage funds to prospective homeowners.

How do Freddie Mac and Fannie Mae affect my loan?

When you obtain a mortgage, it's likely that your loan will be sold to either Freddie Mac or Fannie Mae. However, this doesn't affect you as a borrower. The terms and conditions of your mortgage will remain the same and you'll still make your monthly mortgage payments to the same lender.

After your mortgage is originated, your lender has the option to sell it to Freddie Mac or Fannie Mae. By selling the mortgage, the lender receives cash that can be used to fund additional loans. Meanwhile, Freddie Mac and Fannie Mae hold your mortgage along with thousands of others in their portfolios or bundle them into mortgage-backed securities (MBS), which are then sold to investors, such as pension funds and mutual funds.

Why did Congress create Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac help ensure that there is a continuous flow of capital to support mortgage lending. The advantage of Fannie Mae and Freddie Mac is that it helps to stabilize the housing market by spreading the mortgage debt risk among multiple investors. Additionally, it keeps mortgage rates relatively low since Freddie Mac and Fannie Mae can borrow money at favorable rates due to their government backing.

Fannie Mae and Freddie Mac also play a crucial role in promoting homeownership. They provide stability by establishing guidelines and standards for mortgage underwriting, which helps lenders determine the eligibility of borrowers. This standardized approach contributes to the availability of mortgage credit and makes it easier for individuals to obtain home loans.

How is the government involved in Fannie Mae and Freddie Mac?

Freddie Mac and Fannie Mae are subject to regulations and oversight by the Federal Housing Finance Agency (FHFA). This ensures that they operate in a safe and sound manner while fulfilling their mission of promoting affordable homeownership.

Fannie Mae and Freddie Mac enjoy certain privileges and support from the federal government. They have access to lines of credit from the U.S. Department of the Treasury, and they benefit from an implicit guarantee that the government will step in and prevent their failure if necessary. This implicit guarantee played a significant role during the 2008 financial crisis when the government took them into conservatorship to prevent their collapse.

Conclusion

Freddie Mac and Fannie Mae are government-sponsored enterprises that play a crucial role in the mortgage industry. They provide liquidity to the market by purchasing mortgages from lenders and packaging them into mortgage-backed securities (MBS). As a homeowner, the sale of your mortgage to Freddie Mac or Fannie Mae has no direct impact on your loan terms or payment process. These entities help stabilize the housing market and keep mortgage rates relatively affordable for borrowers across the country.