What Are Fannie Mae and Freddie Mac?

If you’re in the market to get a mortgage to buy a home, you’ve probably heard of Fannie Mae and Freddie Mac.

Despite their names, Fannie and Freddie aren’t people. They’re government-sponsored enterprises that support the secondary mortgage market in ways that make it easier for lenders to offer affordable loans to first-time homebuyers.

What Is Fannie Mae?

Fannie Mae is a government-sponsored enterprise and publicly traded company that operates in the mortgage industry. Its official name is the Federal National Mortgage Association.

Fannie Mae’s history

Fannie Mae was founded in 1938 after the Great Depression caused nearly 25% of homeowners in the United States to lose their homes to foreclosure. Congress created Fannie Mae as part of the New Deal to encourage steady funding for mortgages.

In the 1940s, Fannie Mae helped finance home purchases for soldiers returning to civilian life from World War II by providing cash that lenders could use to make those loans. This led to a spike in homeownership, and the government changed Fannie Mae from a government agency into a mixed-ownership corporation in 1954. Fannie Mae became a private, shareholder-owned corporation through the Housing and Urban Development Act of 1968.

The 1980s saw the creation of mortgage-backed securities, which are investments secured by a collection of mortgages. Payments on the mortgages in such a security are paid to the investors who bought the security. Mortgage-backed securities allowed investors from all over the globe to invest in U.S. consumer mortgages.

When the housing market collapsed in 2008, Fannie Mae lost billions of dollars. The government responded by placing Fannie Mae in conservatorship under the Federal Housing Finance Agency. The company returned to profitability in 2012 and paid off its debts by 2014.

Fannie Mae’s role

The role of both Fannie and Freddie is to provide liquidity, stability, and affordability in the American mortgage market. The primary way they do this is by buying mortgages from lenders and either holding these loans or packaging them into securities that investors can trade.

Lenders take the money they receive from selling their loans to Fannie and fund additional mortgages. By providing a steady flow of cash, Fannie makes it easier for lenders to offer loans to consumers.

Fannie Mae also offers housing educational resources, and financial and disaster relief to families.

Fannie Mae loan programs

Fannie Mae offers a wide range of mortgage options, many of them designed to help first-time buyers afford a home. Each has a different purpose and is aimed at a different type of borrower:

• HomeReady. Offersloans with low down payment requirements to low-income borrowers earning no more than 80% of the area median income.
• 97% Loan-to-Value Standard. Allows borrowers to get a loan with a down payment as low as 3%, with no income limits.
• HFA Preferred. A loan program designed to help state housing finance agencies serve low- and moderate-income borrowers.
• HomeStyle. A loan designed for renovating a home or improving its energy efficiency.
• Construction-to-Permanent. Loans for people who want to buy land and build a home.
• Manufactured Housing. Loans designed for the purchase of affordable manufactured homes.
• HUD-184. Loans for Native Americans buying a property on tribal land.
• RefiNow. Refinancing options for low-income borrowers.
• Conforming loans. Mortgages that meet FHFA requirements for credit scores, loan amounts, loan-to-value ratios, and debt-to-income ratios.

Fannie Mae lending requirements

Fannie Mae isn’t a lender, so you can’t apply for and get a loan from Fannie. Instead, Fannie Mae works with mortgage lenders to give them the funds they need to originate loans.

If a lender wants to sell a mortgage to Fannie Mae, the loan needs to conform to Fannie Mae’s lending requirements. That means following the requirements of one of the company’s various mortgage programs, such as HomeReady or HomeStyle loans. If the borrower isn’t using one of those programs, then their loan needs to meet the FHFA’s conforming loan standards.

For 2023, the conforming loan requirements are:

• Maximum loan amount: $726,200 baseline limit for a single-family home; as high as $1,089,300 in high-cost areas.
• Minimum credit score: 620 in most cases; 640 for manually underwritten adjustable-rate mortgages.
• Minimum down payment: 3% for first-time or low-income buyers.
• Maximum DTI ratio: Generally, no higher than 50%.

What Is Freddie Mac?

Freddie Mac, like Fannie Mae, is a government-sponsored enterprise that helps provide liquidity to mortgage lenders. Its official name is the Federal Home Loan Mortgage Corp.

Freddie Mac’s history

Freddie Mac was created by Congress in 1970 to provide competition for Fannie Mae after it became a shareholder-owned corporation. Its charter was largely the same as Fannie Mae’s: to expand the secondary market for mortgages and provide liquidity for the U.S. mortgage market.

Freddie Mac’s role

Freddie Mac’s role is to help provide liquidity in the mortgage market. It does this by buying mortgages from lenders and either holding them or packaging them into mortgage-backed securities that can trade on the secondary market. Lenders use the funds they receive from selling mortgages to Freddie Mac to originate more loans.

In 2022, Freddie Mac helped finance more than 900,000 home purchases.

Freddie Mac loan programs

Freddie Mac offers a large variety of loan programs, each intended for a different type of borrower:

• Home Possible. Offersloans with low down payment requirements for low-income borrowers making no more than 80% of the area median income.
• GreenCHOICE. Loans designed to cover the cost of energy-efficient renovations to a home.
• Affordable Seconds. Loans for low- and moderate-income borrowers who need a second mortgage or other assistance making a down payment or paying closing costs.
• Super Conforming Mortgages. Loans for large amounts in high-cost areas.
• Construction Conversion. Loans for borrowers who are building a home.
• Manufactured homes. Loans for the purchase of manufactured homes.
• Refi Possible. Mortgage refinance options for low- and moderate-income borrowers.
• HomeOne. Mortgages with low down payment requirements for first-time buyers.
• HeritageOne. Financing for Native Americans purchasing a home on tribal lands.
• Conforming loans. Loans that meet FHFA requirements for loan amounts, LTV ratios, credit scores, and DTI ratios.

Freddie Mac lending requirements

Like Fannie Mae, Freddie Mac isn’t a direct lender. Instead, it works with lenders to purchase mortgages the lender originates. Lenders that want to sell a mortgage to Freddie Mac must follow the requirements of one of its loan programs when originating that loan.

For conventional mortgages, Freddie is subject to the same FHFA-set requirements as Fannie, including:

• Maximum loan amount: $726,200 baseline limit for a single-family home; as high as $1,089,300 in high-cost areas in 2023.
• Minimum credit score: 620 in most cases; 640 for manually underwritten adjustable-rate mortgages.
• Minimum down payment: 3% for first-time or low-income buyers.
• Maximum DTI ratio: Generally, no higher than 50%.

Other types of loans may have differing requirements.

Differences Between Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are similar entities, but there are differences in how they operate.

Fannie Mae tends to buy its loans from large commercial banks that have branches across the country. Freddie Mac typically works with community banks. Which type of lender you work with will affect which entity may buy your loan.

Another difference is in their age and purpose. Fannie was established after the Great Depression to help provide affordable funding in the housing market. Freddie was established to compete with Fannie and expand the secondary market for mortgages.

Both entities also have different loan programs available. There is significant overlap — such as HomeReady and Home Possible loans both targeting low-income borrowers — but each entity has its own loan programs. They also may have different lending requirements and approval guidelines for some programs. However, conventional loan requirements are the same for both Fannie and Freddie.

Who Regulates Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises and are overseen by the FHFA. The Housing and Economic Recovery Act of 2008 established the FHFA and tasked it with this oversight.

The FHFA oversees and regulates Fannie and Freddie in a few ways. One is through its conforming loan requirements. Fannie and Freddie can only securitize loans that meet these requirements. The FHFA also issues annual scorecards for the companies. These scorecards address affordability, fair lending, and equity for the entities, and try to hold them accountable to their missions and safe operating practices.

Fannie Mae and Freddie Mac in the 2008 Financial Crisis

The 2008 financial crisis was one of the worst recessions since the Great Depression. It was caused in large part by a collapse in the value of mortgage-backed securities, like the ones that Fannie and Freddie create from the mortgages they buy.

Fannie and Freddie are government-sponsored enterprises but are owned by private shareholders. Like other companies, they compete with each other to earn a profit to benefit their shareholders. This competition led to them buying many subprime loans, meaning those from borrowers with poor credit scores and a higher likelihood of default.

Eventually, the housing bubble popped, and homeowners began defaulting on their loans. Fannie and Freddie were forced to make whole the investors who owned the loans that were now in default.

“Fannie Mae and Freddie Mac faced significant challenges during the 2008 recession due to their exposure to subprime mortgages,” says Michael Ryan, a retired financial planner from West Palm Beach, Florida. “To prevent their collapse and stabilize the housing market, the government placed them under conservatorship.”

By 2012, the companies once again began earning a profit. Fannie and Freddie repaid their debts to the federal government by 2014.

Fannie Mae and Freddie Mac During the COVID-19 Pandemic

The COVID-19 pandemic caused another major upheaval in the American financial system as the economy quickly came to a halt. Many government programs sought to help people deal with the economic uncertainty the pandemic caused.

One provision of the Coronavirus Aid, Relief, and Economic Security Act was a foreclosure moratorium. This meant that borrowers with loans backed by either of the government-sponsored enterprises could get up to 18 months of payment forbearance and avoid foreclosure.

Both Fannie and Freddie implemented policies to help lenders and servicers manage the increased volume of mortgage applications and loan modifications during the pandemic, Ryan says.

Fannie Mae and Freddie Mac FAQ

Fannie and Freddie are large and complicated entities. Understanding how they work can help you understand a lot about how the mortgage and housing markets work.

The Bottom Line on Fannie Mae and Freddie Mac

Freddie Mac and Fannie Mae are two key players in the United States mortgage industry. Understanding what they do and the different mortgage programs they offer can be a big help if you’re thinking about buying or refinancing a home.