Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Mortgage Corporation) are governmental entities that play a vital role in the U.S. financial and housing markets. Freddie Mac and Fannie Mae buy mortgages from lenders such as banks and savings and loans. This is very beneficial for lenders as it frees up funding to issue more mortgages. This also benefits consumers and businesses by making mortgages more widely available.
The mortgages that are purchased by Freddie Mac and Fannie Mae are then bundled together and sold as securities to investors. The proceeds that result from selling the securities are then used to once again purchase more mortgages from lenders. The entire process helps to provide both stability and liquidity to the financial and housing markets. It provides the means for the origination of more loans and also helps to keep interest rates relatively low for borrowers. Over half of all U.S. home loans are guaranteed by Freddie Mac and Fannie Mae, totalling over $5 trillion.
The secondary mortgage market was created during the Great Depression to respond to the housing crisis. Due to the run on the banks and financial uncertainty, loans were not being originated. Fannie Mae was formed in 1938 and was charged with buying mortgages from lenders and then reselling them to investors. The ultimate goal was to make home ownership more widely available and affordable to more Americans.
Investors flocked to the securities due to the fact that they had the backing of the federal government as well as the strong underwriting standards. Fannie Mae was privatized in 1968 due to the financial pressures caused by the Vietnam War, and in 1970 Freddie Mac (Federal Home Mortgage Corporation) was formed to compete with Fannie Mae.
Freddie Mac and Fannie Mae are government entities that are backed by the federal government, exempt from local and state taxes and have a line of credit with the Treasury Department. Fannie Mae and Freddie Mac securities have historically been popular with investors due to the government backing which has helped to keep interest rates low and provide additional liquidity to the financial markets.
During recent years Freddie Mac and Fannie Mae became more involved in sub prime lending and took on higher risk mortgages. During the recent sub prime mortgage crisis many of the mortgages ended up in foreclosure and the value of the Freddie Mac and Fannie Mae securities fell drastically. This resulted in a housing and financial crisis. The federal government intervened, and in the fall of 2008 Freddie Mac and Fannie Mae became conservatorships of the federal government.