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What Are The Key Differences Between Fannie Mae and Freddie Mac?
Anyone can explain the major differences between Fannie Mae and Freddie Mac? No matter how much someone explains to me the difference, I get more and more confused.
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5 Replies
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Fannie Mae (officially known as the Federal National Mortgage Association) and Freddie Mac (officially known as the Federal Home Loan Mortgage Corporation) are both government-sponsored enterprises (GSEs) in the United States that play a significant role in the mortgage market. While they share similarities, there are some key differences between the two:
Origins and Charters:
Fannie Mae: Originally established in 1938 as a government agency during the Great Depression, Fannie Mae became a private, shareholder-owned company in 1968. Its mission is to provide stability and affordability to the housing market by purchasing and guaranteeing mortgages from lenders.
Freddie Mac: Created in 1970, Freddie Mac is a relatively newer entity. Its purpose is also to support the housing market by purchasing and securitizing mortgages, primarily those for low- and moderate-income families. Freddie Mac was established in response to the need for additional competition and liquidity in the secondary mortgage market.
Ownership Structure:
Fannie Mae: Fannie Mae operates as a publicly traded company, meaning it is owned by private shareholders. However, it was placed into conservatorship by the federal government in 2008 during the financial crisis, and as of my last knowledge update in January 2022, it remains under the control of the Federal Housing Finance Agency (FHFA).
Freddie Mac: Similar to Fannie Mae, Freddie Mac is a publicly traded company with private shareholders. Also, it went into conservatorship in 2008 and is under the supervision of the FHFA.
Operations and Focus:
Fannie Mae: Fannie Mae primarily focuses on the secondary mortgage market by purchasing and guaranteeing conventional mortgages. It works with a broad range of lenders and supports the availability and affordability of mortgage credit for homebuyers.
Freddie Mac: Freddie Mac’s focus is also on the secondary mortgage market, and it purchases and securitizes conventional mortgages. Like Fannie Mae, it plays a role in increasing liquidity and stability in the housing finance system.
Types of Loans Purchased:
Both Fannie Mae and Freddie Mac primarily deal with conventional mortgages, but they have expanded their activities to include certain types of government-backed loans, such as FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans.
Regulation and Oversight:
Both GSEs are subject to regulation and oversight by the FHFA, which acts as their conservator since the financial crisis. The FHFA ensures that Fannie Mae and Freddie Mac fulfill their mission while operating in a safe and sound manner.
It’s important to note that the information provided here is based on my knowledge as of January 2022, and there may have been developments or changes in the operations of Fannie Mae and Freddie Mac since then.
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Distinguishing between Fannie Mae and Freddie Mac can take a lot of work. However, analyzing their key features can illuminate their function within the housing finance system. The following is a simple comparison of both institutions:
Basic Overview
Fannie Mae (Federal National Mortgage Association)
- A new deal venture was acquired during the expansion of the mortgage money flow in 1938.
- Primarily caters to commercial banks and other loan financing institutions to purchase loans.
Freddie Mac (Federal Home Loan Mortgage Corporation)
- It was originally established in 1970 to ensure that Fannie Mae had some competition and was able to broaden homeownership.
- Acquires loans from smaller credit unions and banks.
Loan Types
Fannie Mae
It specializes in conventional loans, which require a minimum credit score and a down payment of at least 3%.
Provides loans for multi-family and single-family homes.
Freddie Mac
Suites is the new market for lower-income and first-time buyers, offering conventional loans.
One of the major programs they offer is “Home Possible,” which allows lower down payments for people with variable credit scores.
Purpose and Function
Fannie Mae
Provides a stable, liquid, and affordable mortgage source to many lenders.
Freddie Mac also plans to boost mortgage credit availability after providing access to shunned market segments.
Freddie Mac: Provides more customized services and products to suit the specific profiles of the borrowers.
Sources of funding.
Sources of funding Fannie Mae: Obtains finance through the sale of mortgage-backed securities (MBS) and various debt instruments. Deals with commercial banks concerning loan purchases.
Freddie Mac: Yes, it sells MBS, including community lenders. Similar funding sources, but there are more deals with smaller commercial banks.
Regulatory framework.
Regulatory framework: Freddie Mac and Fannie Mae are GSEs, meaning they have unending goals but act as private institutions. They are also supervised by the Federal Housing Finance Agency, which regulates their activities to meet certain legal requirements—Borrower impact.
Borrowers impact Fannie Mae: Access to affordable mortgage financing. For Freddie Mac, there is a higher likelihood of incentivizing lenders to offer lower rates or better terms to certain targeted people, e.g., first-time homeowners.
In brief, Fannie Mae has close relationships with large commercial banks. She facilitates conventional loans, while Freddie Mac works with relatively small commercial banks and facilitates low-income homeownership programs.
Both have almost similar end goals but have differences in the approach that they follow.
With the proper emphasis on these differences pointed out above, you can now better discern the operations of Fannie Mae and Freddie Mac in the US housing finance market. If, however, you still have questions about any specific areas, feel free to point me!
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What are the specific differences in their loan underwriting guidelines?
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There are differences in the underwriting guidelines between Fannie Mae and Freddie Mac that affect how a borrower would qualify for the said program. Some of the key differences when it comes to the underwriting guidelines are as follows :
Requirements for the Credit Score
Fannie Mae:
- A minimum credit score of around 620 is set for most loans.
- Some programs allow a lower score.
- For example, certain loans with higher down payments require a minimum score above 620.
Freddie Mac:
- The minimum credit score is 620.
- However, those with a lower score than this can avail of more options under the best possible program of Freddie Mac, which has some requirements and allows 580 as the minimum score.
Requirements for the Down Payment
Fannie Mae:
- The target is to reach a minimum down payment of 3% for first-time home buyers under the Home Ready program.
- A 5% target for other normal Loan Borrowers.
Freddie Mac:
- The aim is to achieve a 3% downpayment for first-time home buyers, particularly low-income people or borrowers likely to use the HomePossible program.
- A target for more leniency concerning the down payment with gifts and grants use.
Debt To Income Ratios (DTI)
Fannie Mae:
- This aligns with a maximum DTI of 50% for most loans, although it is worth noting that far lower ratios are preferable.
- However, higher DTI ratios are permissible, just with certain compensating factors, such as robust cash reserves or a top credit profile.
Freddie Mac:
- Like Fannie Mae, a maximum DTI ratio of 50% is permitted, but lower ratios are preferred.
- Has specific guidelines for higher DTI ratios under the Home Possible program.
Fannie Mae:
- Income must be documented.
- W-2s, tax returns, and pay stubs or letters from the employer.
- Certain types of income, like bonuses and commissions, are also possible with the right documentation.
Freddie Mac:
- Same as above, but may have different sources of income, such as self-employment.
- Other sources of income, such as rental income, are also allowed, subject to certain restrictions.
FANNIE MAE:
- Family housing, single-family homes, condos, multifamily (inter-units 1-4), and an acceptable variety of property types are available.
- There are detailed instructions for investment properties, too.
FANNIE MAE AND FREDDIE MAC SHARE:
- Another similar type of property is also acceptable, with multifamily being more such criteria are relied on.
- There is always a greater degree of relaxation concerning some housing within the confines of the home affordable possibilities program.
FANNIE MAE:
- Mortgage insurance becomes a prerequisite within the limit of a 20 percent down payment for the purchase or refinance.
- Borrowers can qualify for lower MI premiums if they opt to do so.
FREDDIE MAC:
- The type of mortgage lender in the U.S. we have regarding MI has some of the same requirements but a few additional MI of its own.
- While Fannie Mae and Freddie Mac have the same basic criteria for loan underwriting, they differ in credit score, DTI, down payment, income verification, and the type of properties eligible for loans.
- Such details can assist borrowers in optimizing their options when applying for a mortgage. If you require any further information or need specific aspects clarified, please don’t hesitate to contact us!
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