Maybe you’ve heard the names Fannie Mae and Freddie Mac tossed around in conversations about homebuying and wondered what they mean or who these famous figures are?! Surprise surprise, they’re actually not people, but government-sponsored entities (gses) that play a massive role in the U.S. housing market. Understanding what they do can give you a big advantage as you navigate mortgages.
Who or what are Fannie Mae and Freddie Mac?
Fannie Mae (fnma): Short for the Federal National Mortgage Association, Fannie Mae was established in 1938 as part of the new deal to support the housing market during the great depression. Think of it as a middleman in the mortgage process, ensuring lenders have funds to provide loans.
Freddie Mac (fhlmc): The Federal Home Loan Mortgage Corporation, or Freddie Mac, was created in 1970 to complement Fannie Mae and add competition. both aim to make homeownership more accessible and keep the housing market balanced.
How do they actually work?
Buying mortgages: Fannie Mae and Freddie Mac purchase home loans from banks and credit unions. This provides lenders with cash to issue more loans.
Securitization: They bundle these mortgages into mortgage-backed securities (mbs) and sell them to investors. Each mbs represents a share of a larger pool of home loans, making them low-risk investments.
Guaranteeing payments: They ensure investors get paid on time, even if homeowners default. This guarantee lowers interest rates for borrowers.
Why should homebuyers care?
- Lower rates: By keeping the market stable, Fannie Mae and Freddie Mac help reduce interest rates, saving you money over time.
- Programs for first-time buyers: Programs like Fannie Mae’s Homeready and Freddie Mac’s Home Possible offer benefits like lower down payments and reduced mortgage insurance.
- Market stability: During economic downturns, they help keep lending available, preventing housing crises.
What about the future?
Their role is critical, so they’re likely here to stay, though political and economic shifts could lead to changes. Keeping up with housing finance news is wise, as reforms might affect mortgage rates and availability.
Final thoughts
Understanding Fannie Mae and Freddie Mac can simplify your homebuying journey. They work behind the scenes to make mortgages more accessible and affordable, helping you achieve homeownership with confidence. Whether you’re eyeing a cozy bungalow or a sleek townhouse, they’re like trusted friends ensuring you’re set up for success.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.