# Explain to me, in English, what Freddie Mac and Fannie Mae are **URL:** \ **Category:** Factual Questions\ **Created:** [July 12, 2008, 10:58am UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225 "2008-07-12T10:58:07Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Ximenean](https://avatars.discourse-cdn.com/v4/letter/x/aca169/32.png) [@Ximenean](https://boards.straightdope.com/u/Ximenean)\ **Post date:** [July 12, 2008, 10:58am UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/1 "2008-07-12T10:58:07Z")
I see these two… entities mentioned frequently in articles and discussions about the US economy. It’s still not clear to me what status they have and what role they take in the mortgage market. They’re kinda independent companies, but also seem to have some kind of federal-level status? We don’t have anything like the two FMs over here. ---
**Author:** ![Moriarty](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/moriarty/32/49_2.png) [@Moriarty](https://boards.straightdope.com/u/Moriarty)\ **Post date:** [July 12, 2008, 11:44am UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/2 "2008-07-12T11:44:13Z")
[Freddie Mac](http://en.wikipedia.org/wiki/Federal_Home_Loan_Mortgage_Corporation) [Fannie Mae](http://en.wikipedia.org/wiki/Fannie_Mae) From the links: > [@](#): > > The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a government sponsored enterprise (GSE) of the United States federal government. It is a shareholder-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the U.S. government, nor do the securities it issues benefit from any statutory government guarantee or protection. > > It is the leading market-maker in the U.S. secondary mortgage market, which helps to replenish the supply money for mortgages and enables money to be available for housing purchases. The name “Fannie Mae” is a creative pronunciation of the company’s initialism that has been adopted officially for ease of identification. > > As of 2008, Fannie Mae and Freddie Mac own or guarantee about half of the $12,000,000,000,000 (twelve trillion dollars) mortgage market of the United States. > [@](#): > > The Federal Home Loan Mortgage Corporation (“FHLMC”) NYSE: FRE, commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation authorized to make loans and loan guarantees. The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market helps to replenish the supply of lendable money available for mortgages lending, and ensures that money continues to be available for new home purchases. The name “Freddie Mac” is a creative acronym of the company’s full name that has been adopted officially for ease of identification (see “GSEs” below for other examples). ---
**Author:** ![Ximenean](https://avatars.discourse-cdn.com/v4/letter/x/aca169/32.png) [@Ximenean](https://boards.straightdope.com/u/Ximenean)\ **Post date:** [July 12, 2008, 12:26pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/3 "2008-07-12T12:26:04Z")
Yeah, I saw those links, but I don’t really understand them. How come we don’t need a Fannie Mae? What is a “market-maker”? Etc. ---
**Author:** ![Diceman](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Diceman](https://boards.straightdope.com/u/Diceman)\ **Post date:** [July 12, 2008, 1:44pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/4 "2008-07-12T13:44:48Z")
I don’t really understand Fannie Mae and Freddie Mac either. I think most Americans who aren’t involved in finance are only vaguely aware of these two companies. We need someone who can give us the Idiots Guide to what these companies do. The US government can set up corporations to fill certain needs. The Post Office is a government-chartered corporation. They have to turn a profit just like any other business, which is why the price of stamps goes up every couple of years, and why it costs $100 to get a passport. Government-chartered corporations can fail just like any other business venture might, altho in practice the government will usually bail them out. They’re not government agencies, altho they do tend to have that sort of aura about them. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [July 12, 2008, 1:51pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/5 "2008-07-12T13:51:59Z")
If a mortgage company lends you a mortgage, then it has a continuing responsibility to administer it (i.e., make sure you are paying on time). What Freddie and Fannie do is “purchase” the mortgage from the original lender, turning it into a security, which then can be bought and sold. That way, the original mortgagor can take the cash it gets from Freddie and Fannie and make more loans and be relieved of the burden of having to administer your mortgage. The benefit is supposed to be that it allows mortgage companies to concentrate just on issuing mortgages rather than administering them. One of the drawbacks – for the mortgagee – is that once your mortgage is sold, you are no longer dealing with a lender with whom you have a personal relationship. ---
**Author:** ![iwakura43](https://avatars.discourse-cdn.com/v4/letter/i/9de0a6/32.png) [@iwakura43](https://boards.straightdope.com/u/iwakura43)\ **Post date:** [July 12, 2008, 1:58pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/6 "2008-07-12T13:58:28Z")
While banks are in the business of making loans–they employ loan officers, advertise mortgage services, etc.,–they don’t necessarily want to be exposed to the risks of YOUR mortgage for the next ~30 years. Instead, the banks do the work putting together the paperwork and then sell the mortgage to Freddie or Fannie, taking a cut. So, if you stop paying your mortgage, your local bank isn’t out (all) of the money; they’ve passed on the risk. Freddie Mac, in turn, takes a whole bunch of individual mortgages and bundles them together, selling slices of these bundles to investors like pension funds. This is much like how mutual funds buy a whole bunch of individual stocks, bundle them together, and sell slices of the bundle to you and me. To get others to buy these bundled mortgages, they also guarantee the performance. So again, if you default on your mortgage, Freddie is out money because they guaranteed the loan to the investor. The investor would be out some money also, but would be able to recover some of the loss from Freddie. ---
**Author:** ![Joey\_P](https://avatars.discourse-cdn.com/v4/letter/j/919ad9/32.png) [@Joey\_P](https://boards.straightdope.com/u/Joey_P)\ **Post date:** [July 12, 2008, 2:00pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/7 "2008-07-12T14:00:51Z")
[QUOTE=acsenray] One of the drawbacks – for the mortgagee – is that once your mortgage is sold, you are no longer dealing with a lender with whom you have a personal relationship. [/QUOTE] For some reason when I got my mortgage from US Bank, I remember having to sign something explaning to me that Freddie or Fannie may buy the mortgage, but I thought they say other then who owns it, nothing else will change. Maybe they just meant the terms, but I thought they said I would keep making the payments to the same place as well. Basically, I wouldn’t even notice it had happened. ---
**Author:** ![Zsofia](https://avatars.discourse-cdn.com/v4/letter/z/7bcc69/32.png) [@Zsofia](https://boards.straightdope.com/u/Zsofia)\ **Post date:** [July 12, 2008, 2:46pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/8 "2008-07-12T14:46:50Z")
My mortgage has been sold three or four times, but not to one of the Macs - Wells Fargo owns it now. This is a huge pain in my ass, as every time they sell it I have to pay somebody different. It’s been Wells Fargo for a couple years now, though. ---
**Author:** ![WF\_Tomba](https://avatars.discourse-cdn.com/v4/letter/w/d9b06d/32.png) [@WF\_Tomba](https://boards.straightdope.com/u/WF_Tomba)\ **Post date:** [July 12, 2008, 2:53pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/9 "2008-07-12T14:53:00Z")
So what can a “government-sponsored enterprise” _not_ do that a regular private corporation could? ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [July 12, 2008, 3:05pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/10 "2008-07-12T15:05:14Z")
[QUOTE=WF Tomba] So what can a “government-sponsored enterprise” _not_ do that a regular private corporation could? [/QUOTE] Guaranteed performance, perhaps? ---
**Author:** ![Duckster](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/duckster/32/1244_2.png) [@Duckster](https://boards.straightdope.com/u/Duckster)\ **Post date:** [July 12, 2008, 3:38pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/11 "2008-07-12T15:38:27Z")
[QUOTE=Diceman] The Post Office is a government-chartered corporation. They have to turn a profit just like any other business, which is why the price of stamps goes up every couple of years, and why it costs $100 to get a passport. [/QUOTE] Passports are issued and managed by the State Department. The Post Office is merely a government location where you can apply for one out of simple convenience to you and the government. When you pay your passport fee, you are required to pay it to the [US Department of State](http://travel.state.gov/passport/get/fees/fees_837.html) and not the Post Office. ---
**Author:** ![Joey\_P](https://avatars.discourse-cdn.com/v4/letter/j/919ad9/32.png) [@Joey\_P](https://boards.straightdope.com/u/Joey_P)\ **Post date:** [July 12, 2008, 3:45pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/12 "2008-07-12T15:45:09Z")
[QUOTE=Duckster] Passports are issued and managed by the State Department. The Post Office is merely a government location where you can apply for one out of simple convenience to you and the government. When you pay your passport fee, you are required to pay it to the [US Department of State](http://travel.state.gov/passport/get/fees/fees_837.html) and not the Post Office. [/QUOTE] That’s not true You pay $75 to the Dept of State and $25 to the USPS. > **[Redirect to Apply for a Passport](https://www.usps.com/passport/)** ---
**Author:** ![gazpacho](https://avatars.discourse-cdn.com/v4/letter/g/6f9a4e/32.png) [@gazpacho](https://boards.straightdope.com/u/gazpacho)\ **Post date:** [July 12, 2008, 3:49pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/13 "2008-07-12T15:49:07Z")
[QUOTE=acsenray] One of the drawbacks – for the mortgagee – is that once your mortgage is sold, you are no longer dealing with a lender with whom you have a personal relationship. [/QUOTE] Who outside of the fictional people in “It’s a Wonderful Life” or the extremely wealthy have every had a close personal relation ship with their bank? ---
**Author:** ![Ximenean](https://avatars.discourse-cdn.com/v4/letter/x/aca169/32.png) [@Ximenean](https://boards.straightdope.com/u/Ximenean)\ **Post date:** [July 12, 2008, 4:01pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/14 "2008-07-12T16:01:09Z")
So let me get this straight - banks take on a loan, then sell it on to Fannie Mae or Freddie Mac, taking a small cut from the interest on the loan but avoiding the risk that the loan might not be repaid at all. But the risk still exists, and it is taken on by Fannie Mae. This all sounds like routine financial shenanigans, that could be taken on by private financial institutions under contract law. I don’t see why quasi-federal agencies need to be involved. Or am I mistaken in thinking of Fannie Mae et al as federal agencies? ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [July 12, 2008, 4:21pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/15 "2008-07-12T16:21:21Z")
[QUOTE=gazpacho] Who outside of the fictional people in “It’s a Wonderful Life” or the extremely wealthy have every had a close personal relation ship with their bank? [/QUOTE] I didn’t say “close, personal” relationship, did I? But the current mortgage crisis perfectly illustrates the situation, because once a mortgage has been bundled with other mortgages and converted into a security, a mortgagee no longer has anyone to go to to renegotiate the terms of the loan if there is a risk of default. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [July 12, 2008, 4:28pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/16 "2008-07-12T16:28:41Z")
[QUOTE=Usram] This all sounds like routine financial shenanigans, that could be taken on by private financial institutions under contract law. I don’t see why quasi-federal agencies need to be involved. Or am I mistaken in thinking of Fannie Mae et al as federal agencies? [/QUOTE] 1. They are not federal agencies. They are owned by private shareholders. 2. When the F.N.M.E. was created in 1938, apparently there weren’t enough private companies doing it. The purpose was to make mortgages available to a much wider proportion of the public. 3. The government regulation of the agencies is supposed to provide a higher level of standards, best practices, security, etc., and act as a pressure on the private market to adopt those standards. ---
**Author:** ![Joey\_P](https://avatars.discourse-cdn.com/v4/letter/j/919ad9/32.png) [@Joey\_P](https://boards.straightdope.com/u/Joey_P)\ **Post date:** [July 12, 2008, 6:27pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/17 "2008-07-12T18:27:05Z")
[QUOTE=gazpacho] Who outside of the fictional people in “It’s a Wonderful Life” or the extremely wealthy have every had a close personal relation ship with their bank? [/QUOTE] ::raises hand:: ---
**Author:** ![Moriarty](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/moriarty/32/49_2.png) [@Moriarty](https://boards.straightdope.com/u/Moriarty)\ **Post date:** [July 12, 2008, 6:39pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/18 "2008-07-12T18:39:52Z")
[QUOTE=Joey P] For some reason when I got my mortgage from US Bank, I remember having to sign something explaning to me that Freddie or Fannie may buy the mortgage, but I thought they say other then who owns it, nothing else will change. Maybe they just meant the terms, but I thought they said I would keep making the payments to the same place as well. Basically, I wouldn’t even notice it had happened. [/QUOTE] There are investors who buy loans, and there are servicers who collect payments, keep track of escrow accounts, negotiate loan modifications, etc. Sometimes, an investor services its own loans (i.e. Countrywide Home Loans, Wells Fargo). Oftentimes, an investor outsources the servicing (i.e. Countrywide also services other loans. Wilshire Credit Corp. is a big servicer, too). So, your loan could be sold and you wouldn’t really notice, since the servicing agent didn’t change, meaning who you paid, and contacted with issues regarding your loan, also didn’t change. If the servicer does change, you are required to receive a “hello letter” informing you of this change in who you are going to be making payments to. [QUOTE=Acsenray] I didn’t say “close, personal” relationship, did I? But the current mortgage crisis perfectly illustrates the situation, because once a mortgage has been bundled with other mortgages and converted into a security, a mortgagee no longer has anyone to go to to renegotiate the terms of the loan if there is a risk of default. [/QUOTE] Slight nitpick, but the borrower is the mortgagor, not the mortgagee. And loan servicers do renegotiate the terms of the loans in cases of default. Especially in this current foreclosure boom, servicers are often offering payment plans. To get one, though, a person needs to be able to provide sufficient evidence that they will be able to stick with the change in terms, and the investor has to sign off on the change, presuming it makes business sense to do so. The caveat is that this isn’t something the lender has to do, and they will make the borrower jump through hoops to get it done. Somebody who expects the lender to fall all over themselves to offer an alteration of the loan terms is going to be sorely disappointed. I will also this opinion, though. One drawback, IMHO, of the proliferation of the secondary market is that the incentive of originators of loans to make sure they are sustainable for the life of the loan is diminished. If I’m going to earn a commission for originating a loan, but then I’m going to sell it to someone else, why do I really care if the loan defaults in a year or two? It isn’t like I’m going to be the one trying to collect payments for the next 3 decades. This, IMHO, is the biggest impetus of the real estate mess we are seeing, where tons of people got loans they couldn’t really afford. ---
**Author:** ![threemae](https://avatars.discourse-cdn.com/v4/letter/t/5f9b8f/32.png) [@threemae](https://boards.straightdope.com/u/threemae)\ **Post date:** [July 12, 2008, 6:42pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/19 "2008-07-12T18:42:29Z")
I believe that one critical aspect of both companies that hasn’t been mentioned is that although essentially the business act like completely normal ones when everything is going well and they are making a profit, the federal government is committed to propping them up if they become insolvent. The backing of the federal government is what has made them uniquely positioned to securitize mortgages, but it also potentially puts the federal government on the hook for an enormous liability if they really screw up or the housing market collapses. Although the debts are backed up by the federal government, the profits for the shareholders aren’t and that has led to their recent precipitous market drops. The NYTime’s coverage and explanation has been excellent: > **[Worst Fears Ease, for Now, on Mortgage Giants (Published 2008)](https://www.nytimes.com/2008/07/12/business/12fannie.html)** > > After a stomach-churning drop in the stocks of Fannie Mae and Freddie Mac, officials and lawmakers managed to calm investors. This has a few diagrams that I found very helpful in understanding more about their role. ---
**Author:** ![Ximenean](https://avatars.discourse-cdn.com/v4/letter/x/aca169/32.png) [@Ximenean](https://boards.straightdope.com/u/Ximenean)\ **Post date:** [July 12, 2008, 6:54pm UTC](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225/20 "2008-07-12T18:54:31Z")
So wait, many US mortgages are ultimately secured by the US government? [Next page](https://boards.straightdope.com/t/explain-to-me-in-english-what-freddie-mac-and-fannie-mae-are/456225.md?page=2)