What is Fannie Mae & Freddie Mac and How Do They Work?

Apr 7, 2023

You may have heard of Fannie Mae and Freddie Mac before. Perhaps you even have a general understanding of them or just associate these terms with owning a home. But what are they? What do they actually do? And why you, as a homebuyer, should care?

According to the Federal Housing Finance Agency, they were created by congress to provide liquidity, stability, and affordability to the mortgage market. Both Fannie Mae and Freddie Mac purchase home loans made by private firms (provided the loans meet strict size, credit, and underwriting standards), package the home loans into mortgage-backed securities, and for a fee, guarantee the timely payment of principal and interest on those securities to outstanding investors, even in the event of a default.

As a result, investors don’t have to worry about credit risk, making home mortgages a particularly attractive investment. And since mortgage lenders don’t have to hold these loans on their balance sheets, they have more capital available to them to lend to other creditworthy borrowers.

A Boost for Potential Home Buyers


Potential home buyers should care, because Fannie Mae and Freddie Mac enable the increased access to credit, creating affordable mortgage options and helping qualified low- to moderate-income home buyers to competitive rates and obtain a mortgage. In addition, as a result of their collective missions to promote homeownership, the down payment could be as low as 3% (although if it is less than 20%, they will require private mortgage insurance [PMI] to protect their investment should there be a default on the loan. Finally, Fannie Mae and Freddie Mac’s standardized underwriting guidelines can help make it easier for the potential home buyer to understand and navigate the process for getting a mortgage.

A Brief History of Fannie Mae & Freddie Mac

Founded in 1938 by Congress during the Great Depression as part of the New Deal, the

Federal National Mortgage Association (Fannie Mae) was established as a government-sponsored enterprise (GSE) to help stimulate the housing market and bring stability to neighborhoods by making mortgages available to moderate- to low-income borrowers. It became a publicly traded company in 1968.

It is important to note that Fannie Mae does not originate or provide home mortgages to borrowers, but, rather, it purchases the loans and guarantees them in the secondary mortgage market, making it one of two of the largest entities in this area.

In the meantime, the Federal Home Loan Mortgage Corporation (i.e., Freddie Mac) was founded by Congress in 1970 to promote competition with Fannie Mae. It is also a government-sponsored enterprise with a very similar mission to Fannie Mae. The main difference, according to Investopedia: “Fannie Mae buys mortgage loans from major retail or commercial banks, while Freddie Mac obtains its loans from smaller banks, often called “thrift banks” or “savings and loan associations.”

We’re Here to Help

For a list of excellent, local mortgage lenders, please call us at 847-274-6676, email us at info@jackiemack.com or go to Jackie’s List. We can also answer your questions to help you better understanding the process and requirements for obtaining a home loan. After all, we’re here to help you every step of the home buying and selling process as well as to get the most enjoyment out of your home and your life in the Evanston area.

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