Fannie Mae, or FNMA, is shorthand for the Federal National Mortgage Association. Freddie Mac, or FHLMC, refers to the Federal Home Loan Mortgage Corporation. The main difference between Fannie and Freddie comes down to who they buy mortgages from. Fannie Maemostly buys mortgage loans from commercial banks, while Freddie Mac mostly buys them from smaller banks that are often called thrift banks.
Fannie Mae and Freddie Mac were created by Congress to perform an important role in the nation’s housing finance system: to provide liquidity, stability, and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.
It may not seem like it, but the banking business model, especially in mortgage lending, is a very unstable business model. Banks borrow short (that is, borrow money from depositors or from 90-day Commercial Paper lenders) and lend it long through multi-year credit cards, one year lines of credit, three year auto loans and, in the case of the mortgage market, three to thirty year mortgages. Depositors can demand their money back at any time, and the 90-day Commercial Paper loans must be renewed every 90 days. If a large portion of the depositors demanded their money back at once or if the banks were not able to roll over the Commercial Paper, the bank would be illiquid and would likely have to close. Fannie Mae and Freddie Mac buy the three-to-thirty year mortgages and give the banks a profit for originating them. The banks get their money back and can lend it out again.
As to affordability, Fannie Mae and Freddie Mac bundle the mortgages and attach a guarantee to the bonds they buy. Since the market considers this a “quasi-guarantee” by the U.S. government, the interest rate that FNMA and FHLMC must pay on these bonds approaches the low interests on U.S. Treasury bonds. This translates to low interest rates on mortgages that qualify for purchase by these two institutions. They are very powerful in the mortgage market, owning or having guaranteed over 60% of all U.S. mortgages.
Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to the enterprises to engage in further lending. The enterprises’ purchases help ensure that individuals and families that buy homes and investors that purchase apartment buildings and other multifamily dwellings have a continuous, stable supply of mortgage money. These institutions also set the rates and the conditions for the mortgages they will buy (called prime mortgages). Fannie Mae and Freddie Mac also help stabilize mortgage markets and protect housing during extraordinary periods of stress in the broader financial system.
Fannie Maewas first chartered by the U.S. government in 1938 and was a company whose stock was sold to the public, and Freddie Mac was chartered by Congress in 1970 as a private company, whose stock was also sold to the public. During the Great Recession, both Fannie Mae and Freddie Mac went bankrupt and were taken over by the U.S. Treasury Department. They are still in what is called conservatorship and pay their profits to the U.S. Treasury.