Fannie Mae Vs Freddie Mac: What’s The Difference?

If you’re familiar with the mortgage lending process, you’ve probably heard about Fannie Mae and Freddie Mac. Both Fannie Mae and Freddie Mac are home mortgage companies created by the U.S. Congress and overseen by the Federal Housing Finance Agency (FHFA). Both federally backed institutions provide liquidity, stability and affordability to the mortgage market. They do this by offering ready access to funds and guarantees to thousands of savings and loans companies, banks and mortgage companies across the country.

While there are many similarities between Fannie Mae and Freddie Mac, there are also some significant differences. We’ll break these two enterprises down even further and give in-depth information about the similarities and differences between Fannie Mae and Freddie Mac.

Both Fannie Mae and Freddie Mac are nationally recognized, federally backed mortgage institutions committed to providing the U.S. housing market with liquidity, stability and affordability. This mission for both government-sponsored enterprises, or GSEs, is crucial to the nation’s housing finance system.

Functions

Fannie Mae and Freddie Mac both compete on the secondary mortgage market as mortgage investors. They serve mortgage markets and provide liquidity to mortgage lenders by purchasing mortgages from lenders and then repackaging them into mortgage-backed securities for sale to investors on the secondary mortgage market.

Allows New Loans To Be Written

Freddie Mac and Fannie Mae’s practice of purchasing mortgage loans is beneficial to mortgage markets for two main reasons. First, purchases made by each enterprise help ensure that home buyers and investors who purchase property have a steady and stable supply of mortgage money. If the banks and non-bank lenders that originate mortgages were not able to sell them to Fannie Mae and Freddie Mac, they would not be able to continue to write loans.

Benefits The Secondary Mortgage Market

Second, Fannie Mae and Freddie Mac expand the pool of funds available for housing by attracting new secondary mortgage market investors by offering packaged mortgage-backed securities and guaranteeing the timely payment of principal and interest on the underlying mortgages. This makes secondary mortgage markets more liquid and lowers interest rates paid by mortgage borrowers.

Histories

Though both enterprises are better known by their nicknames, Fannie Mae and Freddie Mac have more official titles: Fannie Mae is the Federal National Mortgage Association (FNMA) and Freddie Mac is the Federal Home Loan Mortgage Corporation (FMCC).

Fannie Mae

Fannie Mae was created in 1939 to combat the lack of affordable housing during the Great Depression. It helped provide continuous and steady funding for housing. It also introduced a new type of mortgage to the market: the long-term, fixed-rate loan with an option to refinance at any time.

In 1954, Fannie Mae adopted a private-public, mixed-ownership hybrid structure, under the Federal National Mortgage Association Charter Act.

For years, Fannie Mae was the primary buyer and seller of federally backed mortgages in the country. In 1968, it was privatized by the U.S. government, making it a shareholder-owned company funded entirely with private capital. Two years after this, Fannie Mae was approved to buy conventional mortgages in addition to Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans.

Fannie Mae also became less popular in 1970 when Congress created Freddie Mac to compete with Fannie Mae.

Freddie Mac

Freddie Mac was created under the Emergency Home Finance Act to expand the secondary mortgage market and reduce interest rate risk for banks.

In 1989, Freddie Mac evolved into a shareholder-owned company as part of the Financial Institutions Reform, Recovery, and Enforcement Act.

Many homeowners impacted by the COVID-19 pandemic struggled to keep up with their mortgage and rent payments. One way the government hoped to alleviate fear was through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The mortgage relief and foreclosure provisions of the CARES Act offered protections for homeowners with mortgages backed by Fannie Mae or Freddie Mac.

The foreclosure moratorium included in the CARES Act expired on July 31, 2021, and the CARES Act provisions stopped when the National Emergency Declaration ended on April 10, 2023.

Fannie Mae and Freddie Mac rolled out flexibilities and COVID-19-specific loss mitigation options to assist clients negatively impacted by the pandemic, including pandemic-related forbearances, modifications, and deferrals.

While there are many similarities between both mortgage enterprises, there are some key distinctions between Fannie Mae and Freddie Mac. Let’s take a closer look.

Mortgage Sourcing

The primary difference between Freddie Mac and Fannie Mae is the types of lenders they source their mortgages from. Fannie Mae buys mortgages from larger, commercial banks, while Freddie Mac buys them from much smaller banks.

Intended Purpose

As you can remember from both enterprises’ history, there are important differences between Fannie Mae and Freddie Mac’s original creation and purpose. Congress created Fannie Mae first to provide accessible funding and more affordable housing. Freddie Mac, alternatively, started as a public enterprise to further expand the secondary mortgage market.

Approval Guidelines

All loans backed by Fannie Mae and Freddie Mac are typically conventional loans, which are not insured by the government. Though they are referred to as “conventional” or “conforming” loans, there are differences in the companies’ guidelines. In particular, they differ on mortgage approval and assessing a potential borrower’s financial profile, which can include their credit history, debt levels and current income. It is rare, but it can be possible for a borrower to get approved by one enterprise and not the other.

Lending Requirements

Fannie Mae and Freddie Mac also have differences in lending requirements. When it comes to the down payment requirements for their mortgage programs, both have different guidelines about low or minimum down payments.

Loan Programs

The two government-sponsored enterprises differ in the programs they offer as well. Fannie Mae offers the HomeReady loan, in which applicants cannot make more than 80% of the area’s median income. On the other hand, Freddie Mac offers the Home Possible loan which requires that applicants cannot make more than the area’s average income.

Now that you’re aware of the similarities and differences between Fannie Mae and Freddie Mac, keep these lessons in the back of your mind during the mortgage lending process.

Ask yourself questions about what types of loan requirements you’re looking for, and whether you want your mortgage sourced from a large or small lender. Continue your research and talk to an expert to learn more about your best home loan options.

If you’re ready to buy a home, start your mortgage application online with the Home Loan Experts at Rocket Mortgage^®.