What is a fannie mae and freddie mac loan

Fannie Mae vs. Freddie Mac

The yields on Fannie Mae and Freddie Mac's corporate debt, known as agency debt , was historically about 35 basis points. Treasury bonds , while 'AAA-rated' financial firms' debt was historically about 70 basis points. Treasury bonds. A basis-point difference might not seem like a lot, but on borrowings measured in trillions of dollars, it adds up to huge sums of money. With a funding advantage over their Wall Street rivals, Fannie Mae and Freddie Mac made large profits for more than two decades.

Over this time period, there was frequent debate and analysis among financial and housing market professionals, government officials, members of Congress and the executive branch about whether Fannie and Freddie's implied government backing was working mostly to benefit the companies, their management and their investors, or U.

One thing was clear: Fannie Mae and Freddie Mac were given a government-sponsored monopoly on a large part of the U. It is this monopoly, combined with the government's implicit guarantee to keep these firms afloat, that would later contribute to the mortgage market's collapse. With their funding advantage, they purchased and invested in huge numbers of mortgages and mortgage-backed securities, and they did so with lower capital requirements than other regulated financial institutions and banks.

Figures 1 and 2, below, produced by the companies' former regulator, the Office of Housing Enterprise Oversight , show the incredible amount of debt issued by the companies, their massive credit guarantees, and the huge size of their retained portfolios mortgage investment portfolios. Treasury debt is used as a benchmark.

What Kind of Support Do the GSEs Receive From Government?

Fannie Mae and Freddie Mac had many critics who tried to raise a red flag of concern about the risks the companies were allowed to take thanks to their implicit government backing. However, despite these early warning cries, Fannie Mae and Freddie Mac found many allies in Congress. While Fannie Mae and Freddie Mac's rivals, along with some public authorities, called for tighter regulation of the mortgage giants, the companies hired legions of lobbyists and consultants, made campaign contributions through their own political action committees, and funded nonprofit organizations to influence members of the U.

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Congress to ensure that they were allowed to continue to grow and take on risk under their congressional charters and implied federal backing. It should come as no surprise that Fannie and Freddie's rivals on Wall Street wanted in on the profit bonanza of securitizing and investing in the portion of the mortgage market that the federal government had reserved for Fannie Mae and Freddie Mac.

What's the Difference Between Fannie Mae and Freddie Mac?

They found a way to do this through financial innovation , which was spurred on by historically low short-term interest rates. They frequently had "exotic" characteristics such as interest-only or even negative-amortization features. Subprime lending took off. Investors such as pension funds , foreign governments, hedge funds and insurance companies readily purchased the sophisticated securities Wall Street created out of all the mortgages it was now purchasing.

As Fannie Mae and Freddie Mac saw their market shares drop, they too began purchasing and guaranteeing an increasing number of loans and securities with low credit quality.

Fannie Mae

It's a simple fact that when home prices are rising, there is less risk of mortgage default. The equity in a home is the single biggest risk measure of default. Homeowners with large amounts of equity do not walk away from their mortgages, and can usually refinance out of a mortgage with soon-to-be-expected payment increases into another mortgage with low initial payments. This is the model upon which homeowners, mortgage originators , Wall Street, credit rating agencies and investors built the mortgage bonanza.

When the housing bubble burst, so did all of their sophisticated risk models. In , Fannie Mae and Freddie Mac began to experience large losses on their retained portfolios, especially on their Alt-A and subprime investments. In , the sheer size of their retained portfolios and mortgage guarantees led the FHFA to conclude that they would soon be insolvent.

By September 6, , it was clear that the market believed the firms were in financial trouble, and the FHFA put the companies into " conservatorship ". Members of the U. Congress were strong supporters of Fannie Mae and Freddie Mac. Despite warnings and red flags raised by some, they continued to allow the companies to increase in size and risk, and encouraged them to purchase an increasing number of lower credit quality loans.

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  • View all Article Categories This means that they are privately owned, but receive support from the Federal Government, and assume some public responsibilities. The GSEs provide a secondary market in home mortgages, purchasing mortgages from the lenders who originate them. They hold some of these mortgages, and some are "securitized" -- sold in the form of securities which the GSEs guarantee. The two GSEs today are among the largest corporations in the world. It is raised every year in line with increases in home prices. The major support consists of the credit lines with the US Treasury.

    Fannie Mae vs. Freddie Mac: Similarities, Differences

    This, along with their histories -- both were public institutions before they became privately owned -- mark them as having a special claim for Government assistance in the event they ever get into financial trouble. As a result, investors consider the notes they issue and the mortgage securities they guarantee almost as good as securities issued by the Federal Government itself.

    Not in the conforming loan market.

    Contents: Fannie Mae vs Freddie Mac

    Because of their Government backing, the GSEs can sell notes and securities at a lower yield than any strictly private secondary market firm. This gives them a monopoly -- or rather a duopoly, since there are two of them -- in the market in which they operate. The GSEs do have emulators, however, in the non-conforming market. While the cast of players changes, at any one time there are usually 15 or more strictly private firms that purchase non-conforming loans and securitize them in much the same way as the GSEs.

    The Government did not select the two firms for special treatment. Both the GSEs began as Government entities, and the major objective in privatizing them while retaining Government support was to encourage development of a private secondary market. The other firms arose later, based on the GSE model, so that objective was achieved. The GSEs are unwilling to give it up, and they have become so powerful politically that they have managed to thwart the several attempts that have been made to take it away.