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Fannie Mae and Freddie Mac: What You Should Know

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Fannie Mae and Freddie Mac play a significant role in fueling the U.S. mortgage lending industry. Fannie Mae (a nickname for the Federal National Mortgage Association) and Freddie Mac (a nickname for Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs), private companies whose operations and objectives are sanctioned by the government.

Fannie Mae and Freddie Mac operate under the oversight of the Federal Housing Finance Agency (FHFA). The agencies help ensure the stability of the U.S. mortgage market and provide lenders with the cash needed to fund mortgages to consumers at affordable rates.

What is Fannie Mae?

Before Fannie Mae’s inception in 1938, the mortgage lending landscape looked quite different from what it is today. In general, loan terms were short and often came with large balloon payments. Then during the Great Depression, almost a quarter of American homeowners lost their homes and banks didn’t have enough money to offer mortgages.

In response to the housing crisis, Congress created Fannie Mae to increase the banks’ capacity to lend to consumers. This, in turn, boosted the housing market and economy, and the long-term, fixed-rate loan that’s standard in the mortgage industry today was conceived.

Initially, Fannie Mae bought and held loans guaranteed by the government. In 1954, Congress restructured Fannie Mae as a public-private mixed-ownership corporation, and later, in 1968, it became a wholly private company. Eventually, the company began purchasing loans in the secondary market and began offering mortgage-backed securities to investors.

Today, Fannie Mae loans continue to be a leading source of home financing for lenders and banks. Its signature program is its HomeReady® Mortgage, though it also offers multiple programs, such as HomeStyle® Renovation — for borrowers seeking rehab loans — and MH Advantage — financing for manufactured homes. Fannie Mae does not lend directly to consumers or service the loans they purchase.

HomeReady Mortgage

Fannie Mae’s HomeReady Mortgage is a fixed-rate loan program aimed to serve low- and moderate-income borrowers. With this loan product, buyers can put as little as 3% down or have a 97% loan-to-value ratio (LTV) when refinancing. However, borrowers will have to pay mortgage insurance until their LTV drops to 80%.

Borrowing requirements for the HomeReady loan are more flexible than typical conventional mortgages. For one thing, homeowners can use multiple sources of funds for the down payment and closing costs, including gifts and grants. Additionally, the minimum credit score is 620, although borrowers with a 680 or higher score may qualify for a better rate. Because this program targets low- and moderate-income borrowers, income limits may apply.

What is Freddie Mac?

Congress chartered Freddie Mac in 1970 as a private company. The secondary mortgage market was expanding, so the government authorized the company to further the supply of mortgage financing. Freddie Mac was the first GSE to purchase mortgages from lenders, and then package and sell them as mortgage-backed securities to investors. Fannie Mae followed suit.

Today Freddie Mac is shareholder-owned. The company, like Fannie Mae, does not lend directly to consumers. Freddie Mac mortgage options include CHOICEHome® Mortgages, a manufactured home loan, and HomeOne℠, a program aimed at first-time buyers. Freddie Mac Home Possible® is the company’s main program.

Home Possible

Home Possible is Freddie Mac’s version of Fannie Mae’s HomeReady. Borrowers can purchase a home with as little as 3% to 5%. Buyers without credit scores can still qualify for Freddie Mac Home Possible, provided they put 5% down and meet other requirements. Homebuyers must be within income limits to qualify for this program.

Fannie Mae and Freddie Mac’s role in 2007-08 financial crisis

When the financial crisis of 2007-08 hit, both Fannie Mae and Freddie Mac experienced significant losses in both their guaranty business and their holdings in the secondary market. Since the companies combined were responsible for most of the country’s mortgage loans, their instability sparked concerns about the implications their bankruptcy would have on the market.

In late 2008, the government stepped in and placed both companies in federal conservatorship. Fannie Mae and Freddie Mac remain shareholder-sponsored companies under the oversight of the government.

How both agencies help keep mortgage rates low

Fannie Mae and Freddie Mac borrow money from investors, which the agencies then use to buy mortgages from banks. This frees up capital for mortgage banks to lend more money, expanding credit access to more borrowers. Because Fannie Mae and Freddie Mac are backed by the government, investors know they’ll be repaid. In turn, the GSEs can borrow at lower interest rates and pass those savings on to banks, which then offer lower mortgage rates to borrowers.

Ultimately, homebuyers and refinancers benefit from this system and pay lower borrowing costs. Securitization, or when mortgages are purchased by investors and turned into mortgage-backed securities, pools the risk if borrowers default. This also contributes to lower borrowing costs than if loans were individually sold.

Fannie Mae and Freddie Mac: Similarities

  • They are both government-sponsored enterprises
  • FHFA oversees them
  • They are responsible for providing liquidity and affordability to the mortgage market
  • They guarantee mortgages financed by private lenders
  • They purchase and sell mortgages in the secondary mortgage market
  • They offer multiple loan programs, including products for first-time and low-income borrowers
  • Neither originates nor services loans

Fannie Mae and Freddie Mac announce new adverse market fee for refinances

Beginning Sept. 1, 2020, Fannie Mae and Freddie Mac will charge a 0.5% adverse market fee for most of its refinance loans. That means homeowners wishing to refinance a conventional loan backed by the agencies will be hit with an extra $500 charge for every $100,000 they borrow. On a $300,000 loan balance, for example, that’s an extra $1,500 fee tacked onto a borrower’s closing costs.

Although the fee is charged to lenders who offer Fannie Mae and Freddie Mac loans, it’s passed on to borrowers applying for conventional rate-and-term or cash-out refinance loans. In a recent lender letter, Fannie Mae cited “market and economic uncertainty resulting in higher risk and costs” as the motive behind the fee.

Fannie Mae and Freddie Mac: Differences

  • Fannie Mae is larger than Freddie Mac
  • The government chartered them at different times
  • They both offer a range of programs to similar types of borrowers, but their requirements often vary

Fannie Mae and Freddie Mac FAQs

Where can you find Fannie Mae guidelines?

Borrowers can find Fannie Mae guidelines in the company’s eligibility matrix. The document spells out the borrower requirements lenders must adhere to for all Fannie Mae loans. Additionally, borrowers can check Fannie Mae income limits with the company’s Area Median Income Tool.

Where can you find Freddie Mac guidelines?

Homebuyers can look up the guidelines for Freddie Mac Home Possible loans using the Home Possible Income and Property Eligibility Tool.

What are the Fannie Mae and Freddie Mac loan limits? 

Freddie Mac and Fannie Mae loans adhere to FHFA loan limits. In 2021, the loan limit for most one-unit properties is $548,250. In high-cost areas, the maximum loan amount is $822,375.

Where can you find Freddie Mac mortgage rates?

Freddie Mac publishes U.S. mortgage rates in its Primary Mortgage Market Survey (PMMS). This weekly report averages the interest rates from participating lenders on 30-year fixed, 15-year fixed and 5/1 adjustable-rate mortgages. The survey reflects market trends and not specific Freddie Mac mortgage rates.

How can Fannie Mae help first-time homebuyers?

Two Fannie Mae home loans may meet the needs of first-time buyers — the company’s HomeReady loan and it’s 97% LTV Standard loan. For either product, at least one borrower must take the Fannie Mae first-time homebuyer education course if all occupying borrowers are first-time buyers.


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