Fannie Mae vs. Freddie Mac: What’s the difference?

If you're learning about how mortgages work so you can buy a home, you’ve likely heard about Fannie Mae and Freddie Mac and wondered what the difference is between them. Fannie and Freddie are government-sponsored enterprises that buy conforming mortgages from lenders and sell them in secondary markets to investors. While there are many similarities between Fannie and Freddie, there also are notable differences.

What are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises created by Congress and overseen by the Federal Housing Finance Agency. They buy mortgages that conform to FHFA standards from lenders and package them into mortgage-backed securities that are sold on secondary markets. This allows lenders to trade completed loans for cash they can use to make more loans. This helps ensure a steady flow of cash to lenders while reducing their risk, which helps create a stable national market for mortgages.

A brief history

Fannie Mae and Freddie Mac are officially known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. Here’s a brief history of each company.

Fannie Mae

• 1938: Congress creates Fannie Mae to make housing more affordable by providing continuous and steady funding for housing. Fannie Mae introduces the long-term, fixed-rate mortgage that can be refinanced at any time.
• 1954: Under the Federal National Mortgage Association Charter Act, Fannie Mae adopts a private-public structure.
• 1968: Fannie Mae is privatized by the U.S. government, becoming a shareholder-owned company funded entirely with private capital.
• 1970: Fannie Mae is approved to buy conventional mortgages in addition to Federal Housing Administration and Veterans Affairs loans.
• 2008: In the wake of the housing market collapse, the FHFA takes control of Fannie Mae, establishing a conservatorship that remains in place today.

A side note: Fannie Mae also became less popular in 1970 when Congress created Freddie Mac to essentially compete with Fannie Mae.

Freddie Mac

• 1970: Freddie Mac is created under the Emergency Home Finance Act to expand the secondary mortgage market and reduce interest rate risk for banks.
• 1989: Freddie Mac evolves into a public, shareholder-owned company as part of the Financial Institutions Reform, Recovery, and Enforcement Act.
• 2008: In the wake of the housing market collapse, the FHFA takes control of Freddie Mac, establishing a conservatorship that remains in place today.

Similarities between Freddie Mac and Fannie Mae

Fannie Mae and Freddie Mac both are government-sponsored enterprises created by Congress to make housing more accessible and affordable, and both are overseen by the U.S. Department of Housing and Urban Development and the FHFA.

Both benefit mortgage markets

So how does buying loans from lenders help mortgage markets? First, purchases made by each enterprise make sure that loans are readily available to home buyers. Second, banks and other lenders that originate mortgages can rely on selling loans to Fannie Mae and Freddie Mac to ensure they have enough cash to continue writing loans.

Attracts new secondary mortgage market investors

Fannie Mae and Freddie Mac expand the pool of funds available for housing by attracting investors to secondary mortgage markets. Fannie and Freddie guarantee timely payment of principal and interest on the underlying loans in the mortgage-backed securities they sell. This makes secondary mortgage markets more liquid and reduces the interest rates borrowers must pay.

Differences between Fannie Mae and Freddie Mac

While there are many similarities between both mortgage enterprises, there are some key differences between Fannie Mae and Freddie Mac.

Mortgage sourcing

The primary difference between Freddie Mac and Fannie Mae is the types of lenders they buy mortgages from. While Fannie Mae buys mortgages from larger, commercial banks, Freddie Mac buys from community banks, regional banks and credit unions.

Intended purpose

Congress created Fannie Mae in 1938 to provide accessible funding and more affordable housing. Freddie Mac started in 1970 as a public enterprise to further expand the secondary mortgage market.

Approval guidelines

Fannie Mae and Freddie Mac typically buy only conventional loans, which are not insured by the government. Though they both buy conforming loans that meet FHFA standards, there are differences in the companies’ guidelines. They differ on mortgage approval and how they assess a potential borrower’s financial profile, which can include their credit history, debt levels and current income. While rare, it is possible for a borrower to get approved under one enterprise’s guidelines and not the other.

Lending requirements

Fannie Mae and Freddie Mac also have differences in lending requirements. When it comes to the down payment requirements for their mortgage programs, both have different guidelines about low or minimum down payments.

Loan programs

Fannie and Freddie each offer their own loan programs.

• HomeReady^® loan by Fannie Mae: Applicants cannot make more than 80% of the area’s median income.
• Home Possible^® loan by Freddie Mac: This loan has the same income restrictions as Fannie Mae's HomeReady loan, but there can be differences in the way the investors look at underwriting factors for qualification purposes.

Current mortgage rates for Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae do not offer loans directly to borrowers and do not set mortgage interest rates. That’s left up to individual lenders.

You can see today's Rocket Mortgage^® interest rates here.

What is the future of Fannie Mae and Freddie Mac?

The Trump administration has said it plans to privatize Fannie Mae and Freddie Mac.

Both companies were established by Congress and operated at first as public-private enterprises. Both companies went fully private for a time, but the federal government took control again in 2008 after they suffered devastating losses when the housing market crashed.

Privatizing Freddie Mac and Fannie Mae would allow them to once again operate as private companies without government backing.

This could lead to stricter lending requirements and higher mortgage rates that would make it more expensive to buy a home.

The bottom line: Fannie Mae vs. Freddie Mac

Understanding how mortgages work helps you make better decisions when it comes to getting a mortgage or refinancing your home. Fannie Mae and Freddie Mac have a long history of making housing more affordable and ensuring lenders can offer loans to as many people as possible.

If you’re ready to buy a home, start your mortgage application online with the Home Loan Experts at Rocket Mortgage.