One of the biggest ways Freddie Mac makes a difference in the mortgage market is by buying loans from smaller banks. The idea is that by getting home loans off the balance sheets of community banks, these types of institutions are able to offer affordable mortgages to a wider variety of consumers.
Because they are government sponsored enterprises, and because they were created by Congressional charter, Fannie Mae and Freddie Mac have a high level of special oversight from the government. Some things to keep in mind about these two companies include:. However, all parties involved, including the FHFA, have retained advisers to help them get back on track for non-governmental ownership. But they were also public companies, whose bonds and shares were widely held by investors. Given their importance, most investors in Fannie and Freddie assumed that they were too big to fail.
If the companies ever ran into trouble, they assumed the government would bail Freddie and Fannie out. This especially gave Freddie and Fannie favorable treatment in the bond market. The implicit guarantee made their bonds less risky bets than bonds from other financial companies, helping them borrow money more cheaply.
Fannie and Freddie borrowed trillions of dollars, meaning that their bonds were very widely held—further ensuring they became too big to fail. Fannie Mae and Freddie Mac pumped more and more money into the U.
This helped support the bubble in home prices that emerged in through Together with lax oversight and financial engineering at big investment banks, unsustainable mortgages took off, with many people getting mortgage loans who might not have qualified for home loan financing in more normal times.
Both homebuyers and the financial system as a whole became overleveraged and unbalanced, driven by financing from Freddie Mac and Fannie Mae. The unwinding of the housing bubble in and the financial crisis that followed in hit Fannie and Freddie hard. To avoid a complete collapse, the FHFA seized the companies and put them into conservatorship on September 6, —just days before Lehman Brothers filed for bankruptcy and sent the financial markets into a tailspin. Investors who still hold the shares are anxious for the companies to leave conservatorship, which would let them trade on a stock exchange again and rise in value.
The plan has three big goals:. The idea is to create a system that keeps mortgages affordable and accessible, but without the implicit guarantee that contributed to the financial crisis of The FHFA has developed a scorecard that is released each year to measure progress towards these goals. Fannie Mae and Freddie Mac sound like they might be the names of your favorite aunt and uncle, but they're actually two major buyers and sellers of home mortgage loans.
That means they buy loans from banks, bundle them together and then sell them to investors. The money banks gain from selling these loan sales enables them to lend more money to homebuyers. Because Fannie Mae and Freddie Mac want to make sure the loans that they buy can be sold, these two federally backed companies set certain lending standards for borrowers.
The loans that adhere to those standards are known as conforming loans. Follow along to find out more about how Fannie Mae and Freddie Mac loans work. Fannie Mae requires those banks to follow certain guidelines for lending money to homebuyers. These guidelines help ensure that Fannie Mae can sell these loans to investors. They include:. These are the guidelines that Freddie Mac establish for loans:. Fannie Mae and Freddie Mac were both created by Congress.
And while they don't lend directly to homebuyers, they still play an important role in financing home loans. By purchasing mortgages and selling them to investors, Fannie Mae and Freddie Mac free up cash for banks, mortgage companies and other lenders to finance home purchases. This also helps keep down interest rates and stabilizes the lending market. Fannie Mae was established in and Freddie Mac in They're structured so that the federal government guarantees they won't default on their debt.
Amid the COVID pandemic, American homeowners with Fannie Mae or Freddie Mac loans have been able to take advantage of potential financial relief if they were struggling to make their mortgage payments.
The FHFA placed both enterprises into conservatorship later that year. This gives the federal government more oversight over their operations for the time being. Without Fannie Mae and Freddie Mac, far less money would be available for mortgage lending. Banks would not lend nearly as much and the mortgages that would exist would probably have higher interest rates. Fewer people would be able to afford to buy homes , so they would be stuck renting.
The enterprises also have programs specifically created to help homeowners. This includes assistance to people buying a home and relief for people impacted by events like the COVID pandemic. This applies to single-family mortgages backed by either entity.
Should a similar economic disaster occur in the future, we may expect for them to enact the same kinds of protections for homeowners. They also allow homeowners with mortgages backed by them to request forbearance plans because of hardship resulting from the pandemic. This allows the homeowners to defer mortgage payments for as long as eighteen months. Financing a new home may seem complicated - but an experienced mortgage adviser makes the process seem easy!
The Wood Group of Fairway is here to help you understand your options. Get started on your free pre-approval right away! Lenders use the cash raised by selling mortgages to the Enterprises to engage in further lending. By packaging mortgages into MBS and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing.
That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers. Fannie Mae and Freddie Mac also can help stabilize mortgage markets and protect housing during extraordinary periods when stress or turmoil in the broader financial system threaten the economy.
Fannie Mae was first chartered by the U. Today it is a shareholder-owned company that operates under a congressional charter.
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