Oftentimes the best way to learn about something is through a classic compare and contrast. In this article the subject is Fannie Mae vs Freddie Mac!

A brief history of Fannie Mae and Freddie Mac

Fannie Mae’s official name is the Federal National Mortgage Association, while Freddie Mac’s official name is the Federal Home Loan Mortgage Corporation. These are two of the most important players in the mortgage industry. Fannie Mae was founded in 1938 in the midst of the great depression by an amendment to the National Housing Act. Freddie Mac wasn’t founded until 1970 through the Emergency Home Finance Act of 1970.

The U.S. Federal government created both entities to ensure consumer access to mortgage loans by freeing up lender capacity. For 30 years Fannie Mae was the only institution that purchased mortgages from banks and lenders. Part of the thinking behind the formation of Freddie Mac was creating competition for Fannie Mae to bolster the government’s objective.

Fannie Mae vs Freddie Mac: both are GSEs

Fannie Mae and Freddie Mac are both government-sponsored enterprises (GSE). The Federal Finance Housing Agency (FHFA) regulates both entities. The FHFA is an independent regulatory agency that oversees everything regarding the secondary mortgage market. In addition to this, the FHFA’s goal is to ensure that Fannie Mae, Freddie Mac, and the overall housing finance system operates effectively. The FHFA accomplishes this by continuously monitoring the two GSEs, and engaging in targeted examinations and risk assessments.

Fannie Mae vs Freddie Mac: both exclusively deal with conforming loans

Conforming loans are loans that conform to guidelines set by GSEs like Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac can only purchase loans that fit these guidelines. For example, the annual limits set for conforming loan amounts are an example of the types of restrictions that exist within these guidelines. Said another way, Fannie Mae and Freddie Mac are not permitted by law to buy mortgages where the loan amount exceeds a certain threshold. For 2021 for most of the U.S. the conforming loan limit for single-family homes is $548,250.

This graphic shows how conforming loan limits have changed over the years:

chart showing history of conforming loan limits and important concept in fannie mae vs freddie mac

How a Conforming Loan Works

As a reminder, the overarching objective of the GSEs is to ensure consumer access to mortgage loans and the housing market. Fannie Mae and Freddie Mac achieve this by acting as a participant in the mortgage market. However they are not issuing mortgages like traditional lenders, but buying mortgages. But both entities can only buy mortgages that meet specific guidelines that are outlined by the FHFA, including the loan size limit noted earlier. Therefore Fannie Mae and Freddie Mac purchase these conforming mortgage loans from other lenders, and free up the lenders to originate more mortgage loans. Because both GSEs aren’t actually issuing mortgages directly to homeowners but buying them from lenders, they are said to participate in the secondary mortgage market.

With that background, let’s dive deeper into the comparison of Fannie Mae vs Freddie Mac. We have already touched on some similarities but there are others as well as some differences, which we discuss below.

The Main Difference: Fannie Mae vs Freddie Mac

The main difference between these entities is the source of the mortgages they buy. Fannie Mae buys its mortgages from larger lenders such as commercial banks. By contrast, Freddie Mac tends to buy its mortgages from much smaller lenders and banks. In addition both entities tend to have slightly different guidelines for lending as well as different product offerings.

On top of this, while both companies operate similarly and serve the same function they operate at different scales. Fannie Mae is significantly larger than Freddie Mac.  This is at least in part because of how much older Fannie Mae is than Freddie mac. While both entities are part of the Fortune 500, Fannie Mae ranks much higher as it is much larger. In the most recent year Fannie Mae’s revenues exceeded $106 billion, more than 60% greater than Freddie Mac’s revenue.

Product Offerings: Fannie Mae vs Freddie Mac

Both entities have different product offerings when it comes to lending. Fannie Mae operates an automated underwriting system called the Desktop Underwriter. This system allows lenders to complete credit risk assessments to determine whether a mortgage loan is eligible for sale to Fannie Mae. Freddie Mac’s Loan Product Advisor provides lenders with access to their credit requirements and risk tools to help them underwrite mortgage loans against Freddie Mac’s credit requirements.

Fannie Mae offers the HomeReady Mortgage for borrowers that meet the following criteria.

  • Low to moderate income
  • Low down payment, which can be as low as 3%
  • Credit score greater than 620
  • First-time home buyer or repeat home buyers

Freddie Mac has offers the HomeOne Mortgage, which has similar characteristics but key differences to Fannie Mae’s offering.

  • No income limits
  • Low down payment of 3% available for first-time home buyers
  • Purchases and no cash-out refinances only

How Fannie Mae and Freddie Mac are similar

Both entities, along with the Federal Home Loan Bank System (FHLB) have played a role in making housing more affordable for Americans for decades. Fannie Mae and Freddie Mac are also publicly traded and therefore have a profit objective given that they serve some other shareholders. They generate a profit by reselling the mortgages that the buy.

Both Fannie Mae and Freddie Mac are under the conservatorship of the FHFA. The majority of their profits go to the U.S. Treasury. The conservatorship restricts which types of activities each entity can engage in. This draws a line between Fannie Mae and Freddie Mac, and other publicly traded companies. For example, under the rules of the conservatorship, both entities are not allowed to pay dividends.

Final Thoughts For Homeowners: Fannie Mae vs Freddie Mac

Hopefully you now have a better idea about these two entities, their history, offerings, similarities and differences. If you’re a homeowner or home buyer, why should you care about Fannie Mae and Freddie Mac? Given their role in the mortgage market we think its important to at least have an idea of what they are and what they do. In addition to the fact that they clearly both impact mortgage loan lending in the U.S., they also could have purchased your mortgage or could purchase a mortgage loan extended to you in the future.