Freddie Mac vs Fannie Mae

Differences Between Freddie Mac vs Fannie Mae

Freddie Mac and Fannie Mae differ from each other as they depend on different mortgage sources. Freddie Mac utilizes smaller banks for buying mortgages. In contrast, Fannie Mae takes the help of larger commercial banks.

Both are aimed at low-income applicants and help reduce initial down-payment. Fannie Mae provides HomeReady programs, whereas Freddie Mac provides HomePossible loans. HomePossible loans offered by Freddie Mac require a slightly higher credit score in comparison to Fannie Mae.

Effective July 28, 2019, qualifying income for Freddie Mac’s HomePossible loan is limited to 80% of Area Median Income. For Fannie Mae’s HomeReady qualifying income is up to 100 % of Area Median Income. Area Median Income is the average income for a geographical area.

Freddie Mac vs Fannie Mae Differences

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Key Takeaways

Fannie Mac vs Freddie Mae Comparative Table

The difference between Fannie Mac and Freddie Mae are as follows:

Elements Freddie Mac Fannie Mae
Foundation Year19701938
NameFHLMC (Federal Home Loan Mortgage Corporation)FNMA (Federal National Mortgage Association)
Mortgage SourceSmaller Banks & LendersBig, Commercial Banks
Purpose of CreationForgiving lenders have another option to sell the loans. Introduced as a competitor of Fannie Mae to lower the overall mortgage rates. (Created by the US Government)For re-starting the housing market during the Great Depression (Created by the US Government)
HeadquartersMcLean, VAWashington, DC
Down Payment RequirementsOffers Home Possible Loan, i.e., Applicant can’t earn an amount exceeding 100% of the area’s median pay.Offers Home Ready Loan, i.e., Applicant can’t earn an amount exceeding
UsefulnessIt helped in keeping the interest charges at a minimal rate & expanding the secondary mortgage market. It helped in re-igniting the mortgage lending system.

What is Fannie Mae?

Fannie Mae, or Federal National Mortgage Association (FNMA), is a securitization agency created by the US Government. The primary purpose behind this security agency is to provide affordable financing. They serve the people who want to buy a house in America. Fannie Mae is the leading source of mortgage financing in the United States.

During the Great Depression, the US faced a severe housing crisis as banks did not have any more capital left to lend & nearly one out of every four house owners faced foreclosure and lost their dream of owning a house. This led to the foundation of Fannie Mae in 1938 by the US Congress. It brought a new, steady, and reliable type of mortgage; the fixed-rate long-term loan.

The Federal National Mortgage Association buys loans from banks and, in return, gives them more capital for lending. FNMA pools these loans based on their tenures and repackages them as (MBS) Mortgage-Backed Securities. MBS are then sold to large insurance firms, pension funds, and hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques.read more after keeping some commission for itself. MBS is a type of mortgage-backed debt security where the value is derived from a pool of residential mortgages.

Furthermore, after enjoying decades-old dominance in government-insured throughout the country, it got privatized in 1968. From 1970 onwards, it got the permission to purchase conventional loans as well.

What is Freddie Mac?

Freddie Mac, or Federal Home Loan Mortgage Corporation (FHLMC), is a government-sponsored enterprise. The whole idea behind the inception of this US-backed Mortgage Company was to give a tough competition to Fannie Mae. It was formed under the Emergency Home Finance Act in 1970

Unlike its competitor, Freddie Mac has had the authorization to buy conventional loans since the beginning. FHLMC frees up the banks’ funds to enable more mortgages. Freddie Mac re-sells mortgage-backed securities to investors on the secondary mortgage market, playing a significant role in expanding it.

Comparing Freddie Mac vs. Fannie Mae, Freddie Mac can create 30-year mortgages, but Freddie Mae cannot.

Example

Consider the following example. The Wall Street Journal reports that FHFA has unveiled the mortgage refinancing initiative. 

The Federal Housing Finance Agency (FHFA) has revealed a new program that aims to assist more households in availing of low-interest rates. FHFA is the federal regulator of Freddie Mac and Fannie Mae.

This new loan can be availed only by those who have not missed a single mortgage payment during the last 12 years. Additionally, they should earn less than 80% of the area’s median pay. 

FHFA predicts $100-$250 savings monthly for borrowers availing of the new loan program.

Freddie Mac vs Fannie Mae Infographics

Freddie-Mac-vs-Fannie-Mae-infographics

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