AEM Mortgage Minute with Deanna Daughhetee

No, Fannie Mae isn’t your mother’s second cousin or the nice elderly lady who lives down the block. After the Great Depression, and the subsequent collapse of the national housing market, Fannie Mae was established in 1938 in order to provide neighborhood banks with federal money in order to finance home mortgages. In 1968, after fiscal pressures created by the Vietnam War, President Lyndon Johnson privatized Fannie Mae in order to remove it from the national budget. In doing so, Fannie Mae became a private company operating as a Government Sponsored Enterprise (GSE) with private capital.
Freddie Mac, also a GSE, was created in 1970 to prevent a monopoly of the market. Although created as government agencies, both Freddie Mac and Fannie Mae operate as publicly traded corporations that are shareholder-owned.
At this date, both Fannie Mae and Freddie Mac control about 90 percent of the nation’s secondary mortgage market.

Here’s How They Work

Freddie Mac and Fannie Mae purchase mortgages from lenders like American Equity Mortgage, package them into securities, guarantee them, then sell them off to investors. From that point on, mortgage lenders use the proceeds from selling the mortgages off to either Freddie Mac or Fannie Mae in order to fund new mortgages at affordable rates instead of carrying the loan to term. So take for example a 30-year loan. It would take a lender 30 years to make their profits, or they can sell it to Fannie Mae or Freddie Mac and make an immediate profit. This in turn frees lenders to lend more money, constantly replenishing funds available for homebuyers. As a result, over the years, millions of Americans have benefited from lower monthly mortgage payments and better access to home financing.