Fannie Mae and Freddie Mac are federal-backed mortgage companies founded by the US Congress. Neither institution creates or provides its own mortgage. Instead, they buy and guarantee mortgages issued through lenders in the secondary mortgage market.
Until the 1990s, the two entities had a virtual monopoly on the secondary mortgage market. At that time, federal regulations and new legislation that allowed banks to merge with other financial companies expanded, intensifying competition with traditional companies. Still, Fannie Mae and Freddie Mac continue to dominate the US secondary mortgage market today, despite concerns that they are two of the biggest to fail companies.
Together, these institutions make the mortgage market more liquid, stable and affordable by providing liquidity and guarantees to thousands of US banks, savings and loan associations, and mortgage lenders. .. What they are doing today to help homeowners and renters during the financial crisis, and the COVID-19 pandemic.
- Fannie Mae was first chartered by the US government in 1938 to help expand the mortgage market, and Congress chartered Freddie Mac as a private company in 1970.
- Rather than forming or servicing a loan, both organizations buy a mortgage from a lender and hold or repackage it as a sellable mortgage-backed securities.
- Lenders use the money they get from selling their mortgages to Fannie Mae and Freddie Mac to make more loans. This gives individuals, families and investors access to a stable supply of mortgages.
- Fannie Mae and Freddie Mac have issued a moratorium on foreclosures and evictions of peasants that will run until March 31, 2021 for the COVID-19 pandemic.
- The Biden administration has extended the deadline for a pandemic foreclosure and eviction of peasants.
What is Fannie Mae?
At the beginning of the 20th century, home ownership was out of reach for many in the United States. Unless you could pay cash for the entire house (most people couldn’t), you were considering an exorbitant amount of down payment and short-term loan.
During the Great Depression, one in four homeowners lost their homes due to foreclosure, banks had no money to lend, and the country faced a real housing crisis. Congress responded in 1938 by establishing the Fannie Mae, known as Fannie Mae, by providing reliable and stable funding for housing. It has brought a new type of mortgage to the market: long-term fixed rate loans with the option of refinancing at any time.
For decades, Fannie Mae has been a major buyer and seller of government-guaranteed mortgages. Congress finally did two things to boost competition in the secondary mortgage market:
- In 1968, Fannie Mae was privatized into a shareholder-owned company that was fully privately funded.
- Founded Freddie Mac in 1970.
Fannie Mae History
Fannie Mae was founded as a federal agency in 1938 as part of an amendment to the National Housing Act. Fannie Mae initially bought a mortgage guaranteed by the Federal Housing Administration (FHA) and later added a loan guaranteed by the Department of Veterans Affairs (VA).
Fannie Mae was converted into a public-private mixed-ownership corporation in 1954 under the Fannie Mae Charter Act. It became privately owned in 1968, and two years later it was authorized to purchase traditional mortgages in addition to FHA and VA loans.
The agency began issuing mortgage-backed securities (MBS) in the 1980s to provide more liquidity in the mortgage investment market. Obtain funds to purchase mortgage-related assets by issuing various debt securities in the US and international capital markets.
What is Freddie Mac?
Freddie Mac is the unofficial name of the Federal Mortgage Mortgage Corporation. It was established in 1970 under the Emergency Housing Finance Act to expand the secondary mortgage market and mitigate interest rate risk for banks. It was reorganized in 1989 as part of the Financial Institutions Reform, Reconstruction and Enforcement Act (FIRREA) and became a shareholder-owned company.
Freddie Mac’s Charter is very similar to Fannie Mae’s Charter in that it expands the secondary market for mortgages and MBS by purchasing loans from banks, savings and loan associations, and other lenders. But unlike Fannie Mae, who buys mortgages from major retail and commercial banks, Freddie Mac buys loans from small banks, such as used clothing banks, which focus on providing banking services to the community. I am.
What do Fannie Mae and Freddie Mac do?
Fannie Mae and Freddie Mac have similar charters, obligations, and regulatory structures. Each buys a mortgage from a lender and either holds it in a portfolio or repackages it as a sellable MBS. The lender then uses the money earned from the sale of the mortgage to make more loans. This helps individuals, families and investors have access to a continuous and stable supply of mortgage funds.
According to their charter, Fannie Mae and Freddie Mac “have established a mortgage secondary market facility.” [and] The business shall be funded by private capital to the maximum extent practicable. Both entities are required to:
- Maintaining stability in the mortgage secondary market
- Appropriately respond to the private capital market
- Provides ongoing support to the mortgage secondary market by increasing the liquidity of mortgage investments and increasing the amount of money available for mortgage lending.
- Facilitates access to mortgage credit by increasing the liquidity of mortgage investments and increasing the funds available for mortgage lending.
Fannie Mae, according to its Charter, manages and liquidates its federal mortgage portfolio to minimize its negative impact on the mortgage market and minimize losses to the federal government. I am responsible.
Who regulates Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac’s Parliamentary Charter have given them Government-Sponsorship (GSE) status, and they operate with a certain relationship with the U.S. federal government and provide a financial backstop. I am. For example, in September 2008, during the financial crisis, they were placed under the direct supervision of the federal government.
In peacetime, government relations remain a little more hidden, but still important. According to their parliamentary charter:
The FHFA regulates, enforces and monitors the capital standards of Fannie Mae and Freddie May, limiting the size of its mortgage investment portfolio. The HUD is responsible for the general housing missions of Fannie Mae and Freddie May.
Fannie Mae and Freddie May’s GSE status has generated some recognition in the safety market. One was that the federal government would intervene and bail out any company in the event of financial difficulties, as was the case before the Great Recession. This is known as an implicit guarantee.
The market believed in this implicit guarantee, allowing Fannie Mae and Freddie Mac to borrow money in the bond market at lower yields than other financial institutions.
Yields on corporate debt, known as Fannie Mae and Freddie Mac’s agency debt, have historically been about 35 basis points higher than US Treasuries. By comparison, AAA-rated financial firms have historically had about 70 basis points more debt than US Treasuries. 35 basis points may not seem like much, but it makes a big difference because it costs trillions of dollars.
Role in the 2008 financial crisis
Fannie Mae and Freddie Mac, who have a financial advantage over Wall Street rivals …