The federal government is heavily involved in the mortgage industry through two GSEs, or government-sponsored enterprises: the Federal National Mortgage Association, which is commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, which is known as Freddie Mac. Both Fannie Mae and Freddie Mac are lenders in the secondary mortgage market.
What Do They Do?
Fannie Mae and Freddie Mac purchase mortgages from financial institutions, providing a way for those financial institutions to have more cash to continue to lend money for additional mortgages. Congress enacted a statutory mission for these GSEs to bring “liquidity, stability and affordability to the U.S. housing and mortgage markets.”
Points of Origination
Despite being separate entities, Fannie Mae and Freddie Mac generally have the same operations. The primary difference is the administration in which the entity was created and the initial reason for its establishment. Fannie Mae was created in 1938 during the administration of President Franklin D. Roosevelt to keep the housing market operational during the Great Depression. Freddie Mac was created by Congress in 1970.
Fannie Mae and Freddie Mac are considered quasi-governmental organizations because they were created by the government and there is considerable government oversight of their operations. These entities, however, are publicly traded. Congress chartered Fannie Mae in 1968 to allow it to become a private shareholder-owned company. Congress created Freddie Mac so that Fannie Mae would not have a monopoly in the secondary mortgage market.
In 2008, the government took over Fannie Mae and Freddie Mac. The government now guarantees the debt that is issued by these government-sponsored enterprises. The economic downturn, the volatility of the housing market and the large number of foreclosed homes led to the downturn in the secondary mortgage market. The government intervened in an effort to keep the mortgage markets in business.