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Fannie Mae vs Freddie Mac

Fannie Mae vs Freddie Mac: They Are Not The Same

When you think about 2 of the mortgage giants and the 2 enterprises that were at the forefront of the Great Recession and Financial Crisis you’d be thinking of Fannie Mae and Freddie Mac.  However, when we look at Fannie Mae vs Freddie Mac we will see that there are a lot of similarities between the two, but there are definitely a few differences that you should know when you are ready to apply for a loan.  To begin with, Fannie and Freddie are both Government Sponsored Enterprises or GSEs for short.  What this means is that they are private companies that are and have been sponsored by the US Government for business within the mortgage industry.  Now since Fannie and Freddie seem to be brought up with one another all the time, you need to understand that these 2 are individual companies that have no connection to one another besides their business model.

What these companies do is purchase mortgages on the secondary market (after your loan closes) and then once they are bought, they are brought together and sold to investors as mortgage-backed securities which are insured by Fannie Mae and Freddie Mac.  Now what happened when the Great Recession hit, the value of the mortgages they were holding also sank and the demand for these securities dried up.  Times got so bad that the US Government had to come and bail these two out to the tune of $187.5 Billion.  The bailout was needed so that both of these companies had enough liquid capital to keep them afloat until the market would stabilize and return back to form.  The good news about the bailout is that Fannie Mae and Freddie Mac have paid back over $215 Billion so ultimately bailing these two mortgage giants out turned a profit for the US Treasury and the taxpayers of the United States.  Since Fannie Mae and Freddie Mac are insuring the securities they are selling, when a borrower defaults on their mortgage, they are ultimately going to pay the investor of the security back and not the borrower.

Fannie Mae vs Freddie Mac: The Difference

As you can see, the business model for both Fannie and Freddie are nearly identical, but there is one main difference in the Fannie Mae vs Freddie Mac argument that we will go over right now and it is which loans each company is interested in buying.  If you think that all loans are created and valued equally, you’d be mistaken because nearly every loan is graded and the risk is assessed before it is sold and put together into a mortgage backed security.  If you think about mortgage backed securities as stocks, there are different levels of risk associated with the different securities that are offered.  When you are looking at Fannie Mae, you will see that the majority of mortgages they purchase are from the big name commercial banks you see across the US such as Chase, Bank of America, and Wells Fargo.  On the flip side Freddie Mac primarily is buying mortgages you would see from the smaller/local banks and primarily will stay away from the big banks.  Given these business practices these two will normally stay out of each other’s way so to speak and stick to the banks that they always purchase from.

There are also some differences in the types of loan programs that are offered to borrowers because even though the basic requirements are similar, each company has their own products that mimic the other so that their product offerings can appeal to the masses.  Let’s use the 3% down payment Conventional Loan offerings by these two as an example.  For Fannie Mae’s program it is called the HomeReady Mortgage where select borrowers are allowed to purchase a home with just a 3% down payment.  Now on the other hand Freddie Mac has a program called Conventional 97 which also has a 3% down payment  requirement.

Fannie Mae vs Freddie Mac: Conforming and Non-Conforming

In order for Fannie Mae and Freddie Mac to insure your Conventional Loans they must conform to Fannie Mae and Freddie Mac Guidelines thus giving them a name of Conforming Loans or Qualified Mortgages or QM.  If loans are written outside of Conforming Guidelines these are call Non-Conforming Loans or Non-QM Loans.  When you have non-conforming loans, Fannie Mae and Freddie Mac will not secure these loans so the risk for these loans lie within the banks and lending institutions that are approving and closing these deals.  When non-QM loans close Fannie Mae and Freddie Mac will not be on the secondary market to purchase them and there is subsequently a lot of risk involved since the government security net is gone putting all the risk on the investors should a default occur.  Normally the individuals who are taking on these non-QM products are either less creditworthy or have loan amounts that exceed Conforming Limits.

Fannie Mae vs Freddie Mac: Questions You May Have

When going over the Fannie Mae vs Freddie Mac debate, I am sure there are some questions you have come up with that have to deal with these two in general since a lot of what they do is similar, you could be wondering why they needed to get bailed out, what was their role in the Great Recession, or other questions.  The questions and answers below will hopefully answer a majority of your questions regarding the Fannie Mae vs Freddie Mac topic.

  1. What was their role in the Great Recession?  The fact of the matter is that Fannie Mae and Freddie Mac had very little to do with the events that lead to the Great Recession and housing crash.  The main problem was the risky sub-prime loans that were showing up all over the place.  These risky loans had a high probability of default and frankly, most of them did.  These loans were not included in Fannie Mae’s or Freddie Mac’s portfolio but as they lost market share before the housing bubble burst, they mistakenly invested highly in these mortgage backed securities that were deemed safe even though they were not to their standards.
  2. Why was the bailout needed?  Just like any other investment firm out there, Fannie Mae and Freddie Mac only dealt with mortgage securities, so when their investments here went south it required them to use a lot of their capital and reserves to stay afloat.  Had it not been for the government bailout, they may not have survived and who knows what kind of damage this would have caused.
  3. What is next for these two?  In the future there definitely needs to be a restructuring of how mortgage backed securities are insured because keeping a majority of loans insured by the government and not private institutions is a definite imbalance that will eventually need to be fixed.  It is not right that the US taxpayers had to assist in the bailout of these two, but you can also argue it helped prevent the economy from falling into worse shape.

Fannie Mae vs Freddie Mac: Conclusion

As you can see from the Fannie Mae vs Freddie Mac debate, these two are very similar in what they do and what their market is and where they differ strictly depends on the lending institution that is writing your loan.  If you are still unsure after the Fannie Mae vs Freddie Mac debate and would like to evaluate your options, please feel free to reach out and give me a call at 888-900-1020 or by email at contact@loanconsultants.org.  We can go over all product offerings from Conventional Loans to FHA Loans and everything in between!

The information contained on LoanConsultants.org website is for informational purposes only and is not an advertisement for products offered by The Bob Vogel Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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