July 7th, 2011 4:42 PM by Richard T. Cirelli
Who Are Fannie Mae & Freddie Mac?
You hear about them in the news all the time but do you know what these entities are, what they do and how they got those funny names?
In the days of the great Depression that started in 1929 and lasted for several years, mortgages were made by savings institutions lending the money that they took in deposits. Sometimes a Bank would have excess deposits to lend out and at other times they would be out of money. With the depression in full swing there were very few people in a position to deposit savings in their banks and so there was no mortgage money to lend.
In an effort to end the depression and enable people to obtain mortgages, President Roosevelt and Congress created The Federal National Mortgage Corporation in 1938. This new agency acted as a clearing house for its member banks to make mortgage money available to everyone, regardless of whether their local bank had money to lend. Thus it provided liquidity to the nation so everyone had an opportunity to obtain a mortgage.
In 1970 the Federal Home Loan Mortgage Corporation was created to expand the secondary market for mortgages and to end the monopoly that the Federal National Mortgage Corporation had since 1938.
Since the name of these two agencies was so long, people starting referring to them by their initials or acronym: FNMA and FHLMC. With a little imagination, FNMA became Fannie Mae and FHLMC became known as Freddie Mac. After a while they were so frequently referred to as Fannie Mae and Freddie Mac that the eventually changed their names and made it official.
Fannie Mae and Freddie Mac are also referred to as the GSE’s (Government Sponsored Enterprises) and as the Agencies. They were private corporations with some Government control over their regulation until the housing/mortgage collapse in 2008 when the Government took full ownership & control.
Fannie Mae and Freddie Mac set the underwriting criteria for all the Bank and Non-Bank Lenders that are approved to sell loans to these two agencies. This provides consistency among the various lenders. Once the Lenders close a loan, it is almost immediately sold to either Fannie or Freddie thereby getting their money back to re-lend to other borrowers. The agencies bundle loans that they buy from several lenders to create Mortgage-Backed Securities (MBS’s). These MBS’s are then traded in the financial markets just like stocks and bonds. In fact, they are considered a type of bond. Various institutions and governments buy the MBS’s thereby recycling the money back to the agencies so they can continue buying more loans.
There will be lots of news about these two agencies in the future as the Government tries to develop a plan to divest itself of these agencies.
Mortgage Rates This Week
The downward swing for mortgage rates may have come to at least a temporary end. Somewhat better economic news, a hopeful start to a resolution of the Greek debt mess, growing concerns about our own debt-limit ceiling and the turn of both the quarter and half-year are all factors contributing to the upward pressure. The end of the Fed's QE2 program no doubt has played a small role in the increase in rates, too. The stock market was the beneficiary of the news and the bond and Mortgage-Backed Securities markets got hurt.
Tomorrow is the release of the single most important report of the month – the June Employment Report. Any variance from what investors are expecting can cause a severe swing in mortgage rates.
You can always find out what’s influencing Mortgage-Backed Security pricing each day by visiting this page on my website: