What is Fannie Mae?

This government-sponsored enterprise is also known as the Federal National Mortgage Association and was designed to expand the secondary mortgage market. Fannie Mae was established by Congress in 1938 during the Great Depression as part of the New Deal. The New Deal is a series of social programs founded in the United States in 1933 by President Roosevelt. The New Deal was enacted in response to the Great Depression to help the United States recover and to prevent future economic depressions. It is a publicly traded company, operating under a congressional charter, that buys mortgages, mainly from commercial banks, and either holds them in their portfolio or packages them into mortgage-backed securities to sell.

What is Freddie Mac?

This government-sponsored enterprise is also known as the Federal Home Loan Mortgage Corporation. Congress founded Freddie Mac in 1970 in an effort to continue to expand the secondary mortgage market. It is a publicly traded company, operating under a congressional charter, that buys mortgages, mainly from smaller banks, and either holds them in their portfolio or packages them into mortgage-backed securities to sell.

What is their purpose in the mortgage industry?

Though separate, these competitors have a similar business model. It works like this: Banks lend money to individuals who are looking to buy homes. The size of these particular loans are usually quite large. Most loans are $200,000 or more, and borrowers have anywhere between 10 and 30 years to repay banks. With so many people applying for mortgages, and with such long pay-back periods, banks could run out of money to loan.

Freddie Mac and Fannie Mae step in and work with the banks. Freddie and Fannie basically buy mortgage loans from banks. This allows the banks to turn a quick profit and gives them the ability to lend more money. After Freddie and Fannie buy the debt from the banks, they then sell it to investors as mortgage-backed securities. They guarantee the loans to their investors, even if the borrower defaults on the loan.