Fannie Mae and Freddie Mac: An Overview

How they assist the mortgage industry and ease COVID-19 mortgage stress

The mortgage market in the United States is incredibly liquid and stable in appreciation to Fannie Mae and Freddie Mac. Generally speaking, acquiring a house mortgage loan will be easy if you want one and can afford it.

Until the 1990s, the two companies had a near-monopoly on the secondary mortgage market. At that point, increased federal oversight and new laws allowing banks and other financial institutions to merge led to increased competition from traditional businesses.

Despite worries that they are two of the biggest “too big to fail” corporations, Fannie Mae and Freddie Mac nevertheless rule the secondary mortgage market in the United States today.

Collectively, these organizations increase the liquidity, stability, and affordability of the mortgage market by supplying liquidity and guarantees to thousands of banks, savings and loans, and mortgage businesses operating in the United States.

Here is an overview of the two groups’ operations, their involvement in the 2008 financial crisis, and their current efforts to help landlords and homeowners in the face of the COVID-19 pandemic.

What Is Fannie Mae?

At the turn of the 20th century, owning a home was out of reach for many Americans.

You were looking at an unreasonably high down payment and a short-term loan that would result in a significant balloon payment unless you could pay cash for a whole property (which few people could).

The banks had no money to lend during the Great Depression, and the country experienced a severe housing crisis as nearly one in four households lost their homes to the mortgage.

 The Federal National Mortgage Association (FNMA), also known as Fannie Mae, was established by Congress in 1938 as a response to this problem. It introduced a brand-new mortgage product to the market: a long-term, fixed-rate loan with a refinancing option available at any moment.

Fannie Mae was the leading buyer and seller of mortgages with government insurance for many years. In the end, Congress took two actions to increase competition in the secondary mortgage market:

• In 1968, it privatized Fannie Mae, establishing it as a firm controlled by shareholders and wholly financed by private funds.

• In 1970, it produced Freddie Mac.

History of Fannie Mae

As part of an amendment to the National Housing Act, Fannie Mae was established as a federal government organization in 1938.

Fannie Mae initially purchased mortgages insured by the Federal Housing Administration (FHA); later, Fannie Mae added loans with VA guarantees to the mix.

In 1954, the Federal National Mortgage Association Charter Act changed Fannie Mae into a public-private, mixed-ownership enterprise. It was given private ownership in 1968 and granted permission to purchase conventional mortgages in addition to FHA and VA loans two years later.

In the 1980s, the agency began issuing mortgage-backed securities (MBS) to increase market liquidity for mortgage investments.

Finances for acquiring mortgage-related assets were raised by issuing various debt securities on domestic and global capital markets.

What Is Freddie Mac?

Freddie Mac is the private name of the Federal Home Loan Mortgage Corporation.

The Emergency Home Finance Act was founded in 1970 to boost the secondary mortgage market and lower interest rate risk for banks.

Following the Financial Institutions Reform, Recovery, and Enforcement Act, it underwent a reorganization and became a shareholder-owned business in 1989. (FIRREA).

Like Fannie Mae, Freddie Mac purchases loans from banks, savings and loans, and other lending institutions to grow the secondary market for mortgages and MBSs.

But in contrast to Fannie Mae, which purchases mortgages from sizable retail and commercial banks, Freddie Mac purchases its loans from smaller financial institutions, like thrift banks, which organize community banking services.

What Functions Do Freddie Mac and Fannie Mae Serve?

The charters, objectives, and regulatory frameworks of Fannie Mae and Freddie Mac are comparable. Every one of them purchases mortgages from lenders to either keep in their portfolios or repackage as MBSs that may be sold.

Lenders then create more loans using the proceeds from selling mortgages. Money lending makes it easier for individuals, families, and investors to access a steady stream of mortgage money.

Fannie Mae and Freddie Mac “create secondary market facilities for residential mortgages [and] require that the operations of such facilities shall be supported by private capital to the utmost degree practicable,” as stated in their charters.

The following is what both organizations must carry out:

• Maintain stability in the home mortgage secondary market.

• In response to the private capital market, act accordingly.

• By boosting the liquidity of mortgage investments and expanding the funding available for residential mortgage financing, you may continue to support the secondary market for residential mortgages.

• Increase the liquidity of mortgage investments and the amount of money available for residential mortgage financing to increase access to mortgage credit.

In addition, Fannie Mae must manage and dispose of federally owned mortgage portfolios under its charter to prevent any negative consequences from dispersing the residential mortgage market and limiting losses to the federal government.

What Differentiates Freddie Mac From Fannie Mae?

Even though Freddie Mac and Fannie Mae were founded at different times, there are still some key differences which are enlisted thus:

• Loan Scheme: The programs that the two government-sponsored businesses provide vary as well. Fannie Mae provides the HomeReady loan, and applicants are not permitted to earn more than 80% of the median income in the region. In contrast, Freddie Mac offers the Home Possible loan, which stipulates that borrowers cannot earn more than the average salary in the region.

• Gathering of Mortgage: The primary distinction between Freddie Mac and Fannie Mae is where they obtain their mortgages. In contrast to Freddie Mac, which purchases mortgages from many smaller banks, Fannie Mae purchases mortgages from larger commercial banks.

• Endorsed Guidelines and Rules: Most loans guaranteed by Fannie Mae and Freddie Mac are conventional, not government-insured.

• Planned Objective: Fannie Mae was the first Company Congress established to make housing and money more accessible. As an alternative, Freddie Mac was founded as a public company to help grow the secondary mortgage market.

• Loan Requirements: Freddie Mac and Fannie Mae have different loaning standards. Both have various rules about low or minimum down payments regarding the requirements for their respective mortgage programs.

Who Regulates Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac operate with specific ties to the US federal government that serve as a financial safety net, following the congressional charters that granted them government-sponsored enterprise (GSE) status.

For instance, they were brought directly under the federal government’s control in September 2008, during the height of the financial crisis.

The government connections are somewhat less evident during regular times, but they are nonetheless significant. Their congressional charters state as follows:

• Five of the 18 directors on each board are chosen by the president of the United States.

• The Secretary of the Treasury may purchase securities from each Company for up to $2.25 billion to increase its liquidity.

• State and municipal taxes do not apply to either business.

• Both businesses are governed by the Federal Housing Finance Agency and the Department of Housing and Urban Development (HUD) (FHFA).

The FHFA controls, upholds, and oversees Fannie and Freddie’s capital requirements and places a limitation on the size of their mortgage investment portfolios. Fannie and Freddie’s overall housing missions are within the purview of HUD.

Vital Note: It is forbidden to discriminate in mortgage lending. You can take action if you believe you have experienced discrimination because of your race, religion, sex, gender, marital status, use of public assistance, national origin, disability, or age. Making a report to HUD or the Consumer Financial Protection Bureau is one of these actions.

A Constant Warranty

The fact that Fannie and Freddie are GSEs has influenced how the market views safety.

One was that, should either Company ever experience financial difficulty, as was the case in the years preceding the Great Recession, the federal government would intervene and rescue these businesses. The term “constant warranty” refers to this.

Fannie Mae and Freddie Mac could borrow money in the bond market at cheaper yields than other financial organizations could because the market trusted this constant warranty.

The yield on the agency debt issued by Fannie Mae and Freddie Mac has typically been about 35 basis points higher than that of US Treasury bonds.

Comparatively, debt from AAA-rated financial institutions has typically yielded around 70 basis points more than debt from the US Treasury.

Although 35 basis points may not seem like much, they had a significant impact given the billions of dollars at stake.

Role in the Financial Crisis of 2008

Fannie Mae and Freddie Mac achieved significant profits for more than two decades during the 1990s and the beginning of the 2000s because of a funding advantage over their Wall Street competitors.

During this time, economists, members of the financial industry, and government officials frequently discussed Fannie and Freddie.

Did American house owners genuinely profit from the implicit government support of Fannie and Freddie? Or did the government assist businesses and their backers while posing a moral hazard?

The government granted government-sponsored monopolies to Fannie Mae and Freddie Mac in a significant portion of the secondary mortgage market in the United States.

With their maintained portfolios, particularly their Alt-A and subprime investments, Fannie Mae and Freddie Mac suffered significant losses in 2007.

The FHFA concluded in 2008 that they would soon become insolvent due to the amount of their retained portfolios and mortgage guarantees.

Federal regulators permitted the two companies to take on an additional $200 billion in debt on March 19 of that year to stabilize the economy.

The corporations were placed under conservatorship by the FHFA on September 6, 2008. However, it was already apparent that the market thought the businesses were having financial problems.

Although they have already paid back the $190 billion in bailout money they received, they are still under protective custody.

Naturally, a massive list of errors contributed to the Great Recession.

However, detractors contend that Fannie and Freddie generated significant debt and credit guarantees in the years preceding 2007 and that Congress ought to have realized the systematic hazards these companies posed to the world financial system.

» QUICK FACT

The Treasury and FHFA declared in September 2019 that Fannie Mae and Freddie Mac could begin holding their profits to support capital reserves of $25 billion and $20 billion, respectively.

The action was a preliminary step in the two’s release from detention.

Role in the COVID-19 Pandemic

If the COVID-19 pandemic has affected you, you might be worried about being able to make your mortgage or rent payments.

Homeowners with mortgages from Fannie Mae and Freddie Mac were given safeguards under the CARES Act.

Before March 31, The CARES Act forbade 2021 lenders and loan providers under the CARES Act from initiating a judicial or nonjudicial foreclosure against you or from concluding a foreclosure judgment or sale.

 Throughout the pandemic, the deadline was repeatedly extended until it passed on July 31, 2021.

If the COVID-19 pandemic has caused you to experience financial hardship, you can ask for a mortgage forbearance for up to 180 days (and possibly another 180 days)

The FHFA also implemented more accommodating lending and appraisal rules to ensure that homebuyers could finalize loans during the epidemic and that all parties could maintain social distance throughout the process.

The federal government offered aid to people who lost jobs due to the pandemic. The American Rescue Plan, the Consolidated Appropriations Act of 2021, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act all temporarily increased unemployment insurance benefits through three programs:

1. Federal Pandemic Unemployment Compensation (FPUC)
2. Pandemic Emergency Unemployment Compensation (PEUC)
3. Pandemic Unemployment Assistance (PUA)

On September 5, 2021, these three programs about unemployment expired. As long as they are within the first 26 weeks of receiving benefits, unemployed people may still be eligible for assistance.

Mortgage Relief Program

Your mortgage servicer can assist with mortgage relief choices if you have a Fannie Mae mortgage and cannot make your payments because of a COVID-19-related job loss, income reduction, or sickness. These options include:

• A forbearance arrangement where your mortgage payments are reduced or stopped for a maximum of 12 months
• In the forbearance period, there are no late fees.
• Options for repayment during the forbearance period, such as a repayment schedule that allows you to catch up gradually or a loan modification strategy that keeps or reduces your monthly payment
• Liberation from eviction and foreclosure

Another mechanism offered by Fannie Mae, the Disaster Response Network, can assist with the COVID-19 emergency’s wider financial ramifications.

For homeowners with Fannie Mae-owned loans and tenants in Fannie Mae-financed properties, the Disaster Response Network offers access to HUD-approved housing counselors.

The counselors can assist you for up to 18 months while developing tailored strategies, including financial coaching and budgeting.

Bonus: Call the mortgage servicer—the business name on your monthly statement—if you’re having trouble making your mortgage payments and ask for assistance.

Freddie Mac Mortgage Forbearance

If the COVID-19 epidemic has affected you directly or indirectly, you might be eligible for assistance if you have a mortgage owned by Freddie Mac. If your loss or decrease in income prevents you from making your mortgage payment, you have several mortgage relief choices right now, including:

• Forbearance of the mortgage for up to 12 months
• penalties and late fees are waived
• All evictions must stop until September 30, 2021.
• After the forbearance period, loan modification options exist to reduce payments or maintain the same installments.

• Caution: Forbearance is not tolerance. Inquire about your post-forbearance alternatives with your mortgage servicer. Be cautious if the alternative involves a balloon payment instead of merely adding the outstanding months to the end of your mortgage.

More Flexible Lending and Appraisal Standards

The FHFA extended the deadline for loosening lending and appraisal rules for homebuyers applying for a mortgage underwritten by Fannie Mae and Freddie Mac during the epidemic to July 31, 2021. They endorsed:

• Substitute appraisals for loans to buy and refinance real estate (conducting drive-by and online appraisals versus on-site)
• Alternative techniques for proving income and work before loan closing (for example, employment verification via email)
• Increasing the scope of powers of attorney (POA) usage to facilitate loan closings (for example, e-signatures)

When Will Fannie Mae and Freddie Mac Shares Trade Anew?

Fannie Mae and Freddie Mac shares are now traded over the counter (OTC), which means you cannot purchase them on a significant stock exchange. As of September 2021, the value of each share of FNMA and FMCC is less than $1.

The firms’ exit from conservatorship, which would allow them to resume trading on a stock exchange and increase in value, is eagerly anticipated by investors who still own shares.

The FHFA released a strategic plan in 2014 for unwinding the conservatorship of Fannie and Freddie. Three primary objectives are included in the plan:

• For the housing finance markets to remain robust, liquid, and practical, The finance market must avoid foreclosures, and mortgage credit must continue to flow safely and soundly.
• Encourage more significant private investments into the mortgage sector to lower taxpayer risk. This objective would lessen Freddie and Fannie’s influence over mortgages.
• Create a new infrastructure for securitizing mortgages on single-family homes.

The goal is to develop a system that maintains mortgage accessibility and affordability while doing away with the implicit guarantee that exacerbated the financial crisis of 2008.

Each year, the FHFA releases a scorecard to track progress toward these objectives. Congress must, however, also determine whether to release Fannie and Freddie from conservatorship.

What Would Ensue If They Entirely Privatized the Us Mortgage Market?

We need a fully private mortgage system administered by Wall Street, claim many conservative analysts and politicians, who turn to vehement rhetoric and untruths about the crisis.

However, the entire private market component led to the collapse of the banking system and caused millions of foreclosures.

In a nutshell, if the US mortgage market were privatized, the availability of house loans would drop if we fail to learn from the financial crisis and quickly remove the government from mortgage financing, denying the middle-class access to mortgage financing.

In Conclusion

The goal of Fannie Mae and Freddie Mac is to maintain stability in the US mortgage market.

Both businesses purchase mortgages from different lenders to maintain a consistent and dependable source of mortgage finance for people, families, and investors.

The 28 million homeowners who have mortgages backed by Fannie Mae and Freddie Mac, as well as how the COVID-19 crisis has affected them, have all been closely watched by the housing sector.

According to the FHFA, the epidemic would cause both Fannie Mae and Freddie Mac to incur billions in additional costs, at least up until the moratorium expired.

Of course, this was in addition to the $6 billion in costs the two had previously racked up.

The public will know the full scope only once the agencies provide specifics at the end of the fiscal year.