Fannie Mae and Freddie Mac: An Overview

The Federal National Mortgage Association, commonly known as "Fannie Mae," and the Federal Home Loan Mortgage Corporation, "Freddie Mac," are the two government-sponsored enterprises (GSEs) chartered by the U.S. Congress in 1938. Neither originates or services its own mortgages. Instead, they buy and guarantee mortgages issued through lenders in the secondary mortgage market.

Their influence over the U.S. real estate market is hard to overstate. The names Fannie Mae and Freddie Mac rarely surface on investing sites or financial news headlines. Yet, these enterprises have been the pillars on which the American housing market of the last 80 years has largely been built. Their sway lies in securitizing loans, effectively transforming individual mortgages into tradable bonds. This constant flow of capital allows lenders to extend more credit, ultimately shaping interest rates and making homeownership accessible to millions of Americans.

Here's a look at how they work, their roles in the 2008 financial crisis, their work for renters and homeowners during the COVID-19 pandemic, and their prospects in the years ahead.

What Is Fannie Mae?

In the early 20th century, homeownership was out of reach for most people in the U.S.. Unless you could pay cash for an entire home (which few people could), you were looking at a prohibitively large down payment and a short-term loan, culminating in a big balloon payment.

Even if you could buy a home during the Great Depression, you might have been among the nearly one in four homeowners who lost their homes to foreclosure. The banks also had no money to lend, and the nation faced a housing crisis. The U.S. Congress responded in 1938 with the National Housing Act, creating the Federal National Mortgage Association, better known as Fannie Mae from its acronym, FNMA, to supply reliable, steady funding for housing. It brought a new type of mortgage to the market: the long-term, fixed-rate loan with an option to refinance anytime. This has become the primary way many Americans buy their first homes.

Fannie Mae initially bought mortgages insured by the Federal Housing Administration (FHA) and later added loans guaranteed by the Veterans Administration (VA), later called Veterans Affairs. The Johnson administration privatized Fannie Mae in 1968, making it a shareholder-owned company funded entirely with private capital. This would have significant effects later on, but it resulted from a budget gimmick: Starting in 1965, Fannie Mae was growing more rapidly. This might have been good for homeowners able to buy homes at the time but bad for the Johnson presidential administration: an accounting quirk meant that Fannie Mae's mortgages were added to the annual budget expenditures, thus increasing the budget deficit.

Two years later, Fannie Mae was authorized to buy conventional mortgages in addition to FHA and VA loans. The agency began issuing mortgage-backed securities (MBS) in the 1980s to offer more liquidity in the mortgage investment market. The money to buy mortgage-related assets came from issuing debt securities offered in the U.S. and international capital markets.

For decades, Fannie Mae would be the main buyer and seller of government-insured mortgages. 

What Is Freddie Mac?

Freddie Mac is the unofficial name of the Federal Home Loan Mortgage Corporation. It was established in 1970 under the Emergency Home Finance Act to expand the secondary mortgage market and reduce interest rate risk for banks. In 1989, it was reorganized as a shareholder-owned company as part of the Financial Institutions Reform, Recovery, and Enforcement Act.

Freddie Mac's charter is like Fannie Mae's. It was meant to expand the secondary mortgage market and MBS by buying loans made by banks, savings and loans, and other lending institutions. But unlike Fannie Mae, which buys mortgages from major retail and commercial banks, Freddie Mac buys its loans from smaller banks, such as thrift banks, that focus on providing banking services to underserved communities.

What Do Fannie Mae and Freddie Mac Do?

Fannie Mae and Freddie Mac have similar charters, mandates, and regulatory structures. Each buys mortgages from lenders to hold in their portfolios or repackage as MBS that can be sold. In turn, lenders use the money from selling the mortgages to originate more loans. This helps individuals and families access a continuous and stable supply of mortgage funding.

According to their charters, Fannie Mae and Freddie Mac "establish secondary market facilities for residential mortgages [and] provide that the operations thereof shall be financed by private capital to the maximum extent feasible." Both entities are mandated to do the following:

• Maintain stability in the secondary market for residential mortgages
• Respond appropriately to the private capital market
• Offer ongoing support to the secondary market for residential mortgages by increasing the liquidity of mortgage investments and making more money available for residential mortgage financing
• Promote access to mortgage credit by increasing the liquidity of mortgage investments and making more money available for residential mortgage financing

Fannie Mae has one additional responsibility according to its charter: to manage and liquidate federally owned mortgage portfolios to minimize adverse effects on the residential mortgage market and minimize potential losses to the federal government.

Who Regulates Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac's congressional charters made them Government Sponsored Enterprises GSEs. Though private, they had ties to the U.S. federal government that was thought to provide a financial backstop, with a line of credit from the U.S. Treasury for $2.25 billion. In September 2008, during the height of the financial crisis, they were placed under the direct supervision of the federal government.

During regular times, the government ties were less apparent but nonetheless important. Each was a unique company unlike any other in the U.S. Here are some of the differences:

• The U.S. president appoints five of the 18 members of the organization's boards of directors.
• The secretary of the Treasury is authorized to buy up to $2.25 billion of securities from each company to support its liquidity.
• Their securities are considered "government securities" under the Securities Exchange Act of 1934.
• These securities did not have to be registered with the U.S. Securities and Exchange Commission.
• They could not originate mortgages, but they could buy them for securitization or investment purposes. In 2008, a year we'll return to, the mortgage amounts were limited to $417,000, effectively closing them out of higher-price real estate areas given their mission to target low- and moderate-income households.
• Both companies are exempt from state and local taxes.
• Both companies are regulated by the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA).
• Should they face insolvency, this was not to be resolved through a bankruptcy process but by Congress.

The FHFA regulates, enforces, and monitors Fannie and Freddie's capital standards and limits the size of their mortgage investment portfolios. HUD oversees Fannie and Freddie's general housing missions.

An Implicit Guarantee

Fannie and Freddie's GSE status created perceptions in the market that its securities were safe. It was widely said that the federal government would step in and bail out these organizations if either firm ever ran into financial trouble, as was seen in the lead-up to the Great Recession. This is known as an implicit guarantee.

Given the market's faith in this implicit guarantee, Fannie Mae and Freddie Mac were allowed to borrow money in the bond market at lower yields than other financial institutions could.

The yield on Fannie Mae and Freddie Mac's corporate debt, known as agency debt, has historically been about 35 basis points higher than U.S. Treasury bonds. AAA-rated financial firm debt, by comparison, has historically yielded about 70 basis points more than U.S. Treasury bonds. While 35 basis points may not seem like much, it made a huge difference, given the trillions of dollars involved.

Role in the Financial Crisis of 2008

In the 1980s, a crisis that hit the savings and loan industry shrunk that sector's part in the real estate market significantly. By the 1990s, computerization enabled far more efficient and faster processing of mortgage applications and MBSs. These, along with other industry changes, meant that Fannie Mae and Freddie Mac expanded significantly throughout the 1990s and early 2000s. During this period, there was a frequent debate about Fannie and Freddie and their holdings among economists, financial market professionals, and government officials.

Even without some analysts' concerns over their ballooning balance sheets, Fannie and Freddie were facing regulatory scrutiny in the early 2000s. An investigation by the Office of Federal Housing Enterprise Oversight, the independent agency overseeing the companies, exposed widespread accounting irregularities that made their operations "unsafe and unsound."

Both entities, it turns out, were using accounting strategies that delayed accounting for expenses and inflated their income. This allowed them to present steady quarterly profit growth—"smooth over" in the wording one executive used—reassuring investors. The tactics often involved the complex timing of derivative contracts. When their misaligned balance sheets finally surfaced, executives at both firms were forced out, years of annual earnings reports had to be resubmitted and billions in losses had to be accounted for, and millions in fines were to be paid.

In 2007, Fannie Mae and Freddie Mac began to take on massive losses on their retained portfolios, especially on their Alt-A and subprime investments. In 2008, the sheer size of their retained portfolios and mortgage guarantees led the FHFA (and everyone else in the market) to conclude that they would soon be insolvent.

On March 19 of that year, federal regulators allowed the two firms to take on another $200 billion in debt, hoping to stabilize them and the wider economy. However, by Sept. 6, 2008, it was clear that the market believed the firms were in financial trouble, and the FHFA put the companies into conservatorship. They received $190 billion in bailout funding, which was paid back by 2014. Nevertheless, they remain in conservatorship under the FHFA.

Under the conservatorship agreements established during the 2008-09 financial crisis, Fannie and Freddie were required to send most of their profits to the Treasury as repayment for being bailed out, preventing them from rebuilding their capital reserves. In 2019, however, new rules were enacted that permit Fannie Mae and Freddie Mac to keep a combined $45 billion in earnings. (This was later increased.) This was seen as an initial step in a broader effort to reform the housing finance system, including ending the government's control over these entities.

Through Dec. 31, 2019, Fannie Mae and Freddie Mac had repaid the Treasury a total of $301 billion in dividends during their conservatorship. Since then, each has been building its capital reserves. In mid-February 2024, Fannie Mae reported that its 2023 year-end net worth was $77.7 billion, with a net income of $17.4 billion for the year. Freddie Mac, for its part, reported its net worth at $47.7 billion, with a net income of $10.5 billion in 2023.

Role During the COVID-19 Pandemic

The federal government initiated emergency measures during the COVID-19 pandemic to help individuals and families meet their mortgage or rent obligations. Most relevant here is the CARES Act, which introduced protections for homeowners with mortgages backed by Fannie Mae and Freddie Mac. The legislation barred lenders and loan servicers from initiating or concluding foreclosures, ultimately expiring on July 31, 2021. For those directly facing financial hardship because of the pandemic, the CARES Act also made it possible to request a mortgage forbearance on Fannie and Freddie loans for up to 180 days, with an option to extend for another 180 days. The forbearance plan lowered or suspended mortgage payments for up to 12 months without late fees or penalties. After the forbearance period, repayment options included plans to catch up gradually or via a loan modification plan to maintain a lower monthly payment.

Fannie Mae offered an additional program, the Disaster Response Network, that assisted with some of the broader financial effects of the pandemic. The network provided access to HUD-approved housing counselors for homeowners with Fannie Mae-owned loans and renters in Fannie Mae-financed properties. The counselors provided advice, personalized plans, financial coaching and budgeting, and support for up to 18 months.

The FHFA also established more lenient lending and appraisal standards during the pandemic. These adjustments ensured homebuyers could proceed with loan applications and closings while adhering to social distancing guidelines and lockdowns.

The financial toll of the pandemic on Fannie Mae and Freddie Mac was significant, as these agencies provided vast liquidity to the mortgage and rental markets. Fannie Mae saw its net income decline by over 20% between 2019 and 2020, and Freddie Mac saw a drop of over 17%. However, both GSEs saw their post-pandemic income increase and their balance sheets stabilized, despite the high interest rates that dampened the real estate market after 2022.

The Bottom Line

Fannie Mae and Freddie Mac are charged with bolstering the U.S. mortgage market to provide housing loans to middle America. Both buy mortgages from various lenders, which helps maintain a steady and reliable source of mortgage funding for individuals, families, and investors. This has meant providing liquidity and stabilization efforts, with the federal government's help, during crises like the Great Recession and the COVID-19 pandemic.

In 2023 alone, they combined to purchase 1.76 million single-family home mortgages. Without Fannie and Freddie, the availability and affordability of mortgage credit would be significantly reduced. Interest rates for homebuyers would likely increase, debt financing would be more difficult for banks and lenders to obtain, and the homeownership rate could decline considerably. Their operations support the broader housing market and the wider economy. Maintaining that access and liquidity for qualified borrowers through future market downturns will remain crucial for many Americans.