Fannie Mae and Freddie Mac

By Kevin Chambers

Fannie Mae and Freddie Mac are two names you may be familiar with. They played a huge role in the aftermath of the 2008 mortgage crisis. But what they are and what do they do?

First off, their common names are based on acronyms of their full names. Fannie is “The Federal National Mortgage Association.” Freddie is “The Federal Home Loan Mortgage Corporation.” Fannie Mae was created first in 1938 through the New Deal. The Great Depression pushed many borrowers to default on their mortgages and most of America’s banks had a liquidity problem, much like in 2008. Fannie Mae was created as a government agency that bought mortgages from banks, so they could use the cash to make more loans, instead of being tied up in bad mortgages. They could then sell the mortgages to investors. This was the first creation of a secondary mortgage market. In other words, this is the first time an easily facilitated marketplace existed to buy and sell mortgages. It led to the creation of mortgage back securities, where Fannie Mae would bundle a group of mortgages together and sell it as an investment product. It pushed a tremendous amount of liquidity into the mortgage market. It also freed up banks to take more risk in their mortgages and start to lend to borrowers who were previously deemed not creditworthy (Pickert, 2008).

In the 1970s, with the pressure of the Vietnam War and other programs, President Johnson and Congress decided to make Fannie Mae a publicly traded company and take the balance of the mortgages off of the US Governments books. Investors could now buy stock in Fannie Mae. Fannie Mae was created to primarily work with big commercial banks. In 1970, Freddie Mac was established to give the same service to smaller banks, often called “thrift banks.” Freddie Mac was founded as a private corporation. Even though Fannie and Freddie acted as private corporations, many investors believed there was an implicit government guarantee, as the Federal Government kept a minority ownership in the corporations (FHFA, 2016).

In 2008, with the collapse of the mortgage market, Fannie and Freddie faced massive losses on their balance sheets and needed a huge bailout. Now the Federal government is the majority shareholder in both companies. The securitization of these loans is almost entirely backed by the government. All of the government housing agencies (also including the VA, FHA and Ginnie Mae) own or guarantee $6.4 trillion in loans, accounting for over 60% of all mortgages in the US. At the peak of the crisis, they held over 80% of mortgages. Before 2007, the agencies held less than 40% of the market (The Economist, 2016). 

In many ways, the mortgage market is a lot safer than before 2008. All of the large banks have very strong balance sheets with unprecedented liquid assets sitting in their coffers. However, most of the big banks in the US have exited the mortgage game. They still buy and sell mortgage-backed securities, but they have stopped originating mortgages. And for better or for worse, this has pushed the majority of home mortgages onto the balance sheet of these two corporations that are essentially run by the government. (The Economist, 2016)

FHFA. (2016). History of the Government Sponsored Enterprises. Washington DC: Federal Housing Finance Agency.

Pickert, K. (2008, July 14). A Brief History of Fannie Mae and Freddie Mac. Time.

The Economist. (2016, August 20th). Comradely capitalism. The Economist.

Photo credit: MarkMoz12 via Foter.com / CC BY