What Are Fannie Mae and Freddie Mac?

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs) that buy mortgages and create mortgage securities. The goal of both Fannie Mae and Freddie Mac is to create liquidity in the mortgage market and to ensure that mortgage options are available to more aspiring homebuyers.

Both Fannie Mae and Freddie Mac operate in the secondary mortgage market and do not directly provide or issue home mortgages. Rather, Fannie Mae and Freddie Mac combine the mortgages they purchase and resell them as mortgage-backed securities. As a result, mortgage lenders' capital is freed up and these lenders can lend to more borrowers.

Fannie Mae was founded in 1938 as part of the New Deal in order to boost the mortgage market after the Great Depression and make mortgages available to lower income borrowers. Fannie Mae was privatized in 1968, becoming a GSE.

Freddie Mac was founded in 1970 in order to stabilize the operation of commercial banks and boost the secondary mortgage market. Freddie Mac went through restructuring in 1989 to become a shareholder-owned company, and is now governed by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

Fannie Mae and Freddie Mac have played and continue to play an important role in the US housing system by contributing to the increase in homeownership rates in the US. On the other hand, Fannie Mae and Freddie Mac have been the targets of criticism after the 2008 financial crisis. Many have argued that their unchecked contribution to increased mortgage loans, especially to low-income borrowers, contributed to causing the crisis.