Fannie Mae was first chartered by the U. Today it is a shareholder-owned company that operates under a congressional charter. Freddie Mac was chartered by Congress in as a private company to likewise help ensure a reliable and affordable supply of mortgage funds throughout the country. It looks like your browser does not have JavaScript enabled.
Please turn on JavaScript and try again. Fannie Mae Web Site Fannie Mae Charter Act Freddie Mac was chartered by Congress in as a private company to likewise help ensure a reliable and affordable supply of mortgage funds throughout the country. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
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Neither institution originates or services its own mortgages. Instead, they buy and guarantee mortgages issued through lenders in the secondary mortgage market. The two entities virtually monopolized the secondary mortgage market until the s. That's when growing federal regulation and new legislation that allowed banks and other financial companies to merge sparked more competition from conventional companies.
Together, these agencies make the mortgage market more liquid, stable, and affordable by providing liquidity and guarantees to thousands of banks, savings and loans, and mortgage companies in the U. Here's a look at how the two work, their roles in the financial crisis , and what they're doing today to help homeowners and renters during the COVID pandemic. In the early 20th century, homeownership was out of reach for many people in the United States. Unless you could pay cash for an entire home which few people could , you were looking at a prohibitively large down payment and a short-term loan that would culminate in a big balloon payment.
During the Great Depression , nearly one in four homeowners lost their homes to foreclosure , the banks didn't have any money to lend, and the nation faced a real housing crisis. It brought a new type of mortgage to the market: the long-term, fixed-rate loan with an option to refinance at any time. For decades, Fannie Mae was the dominant buyer and seller of government-insured mortgages. Congress eventually did two things to boost competition in the secondary mortgage market:.
Fannie Mae was created as a federal government agency in as part of an amendment to the National Housing Act. Fannie Mae was converted into a public-private, mixed-ownership corporation in under the Federal National Mortgage Association Charter Act.
It became privately owned in and two years later became authorized to buy conventional mortgages in addition to FHA and VA loans.
The agency started to issue mortgage-backed securities MBS in the s to provide more liquidity in the mortgage investment market. It gets the money to buy mortgage-related assets by issuing assorted debt securities in the U. It was established in under the Emergency Home Finance Act to expand the secondary mortgage market and reduce interest rate risk for banks.
Freddie Mac's charter is quite similar to Fannie Mae's in that it expands the secondary market for mortgages and MBSs by buying loans made by banks, savings and loans , and other lending institutions. But unlike Fannie Mae, which buys mortgages from major retail and commercial banks, Freddie Mac buys its loans from smaller banks, such as thrift banks , that focus on providing banking services to communities.
Fannie Mae and Freddie Mac have similar charters, mandates, and regulatory structures. Each buys mortgages from lenders to either hold in their portfolios or repackage as MBSs that can be sold.
In turn, lenders use the money they get from selling mortgages to originate more loans. This helps individuals, families, and investors access a continuous and stable supply of mortgage funding.
According to their charters, Fannie Mae and Freddie Mac "establish secondary market facilities for residential mortgages [and] provide that the operations thereof shall be financed by private capital to the maximum extent feasible.
Fannie Mae has one additional responsibility according to its charter: to manage and liquidate federally-owned mortgage portfolios to minimize any adverse effects on the residential mortgage market and minimize losses to the federal government. According to Fannie Mae and Freddie Mac's congressional charters , which gave them government-sponsored enterprise GSE status, they operate with certain ties to the U. For instance, in September , during the height of the financial crisis , they were placed under the direct supervision of the federal government.
During normal times, the government ties remain a bit more hidden, but nonetheless important. According to their congressional charters:. The FHFA regulates, enforces, and monitors Fannie and Freddie's capital standards and limits the size of their mortgage investment portfolios. HUD is responsible for Fannie and Freddie's general housing missions. Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take.
Fannie and Freddie's GSE status has created certain perceptions in the marketplace of safety. And this is where the lawsuit comes in. Starting in , the financial condition of Freddie and Fannie improved, and the two began returning lots of money to the Treasury. Fannie and Freddie shareholders claimed in their suit that the FHFA exceeded its statutory authority as the companies' conservator by essentially agreeing to give all profits to the Treasury.
Shareholders also claimed that the structure of the FHFA is unconstitutional because it has a sole director whom the president can only remove "for cause. The Supreme Court dismissed shareholders' first claim regarding statutory authority, but did leave an opening for the second claim. Justice Samuel Alito wrote that "the possibility that the unconstitutional restriction on the President's power to remove a director of the FHFA could have such an effect cannot be ruled out. But perhaps another disappointment for shareholders is that the lawsuit now enables the White House to remove FHFA Director Mark Calabria from his post, which it did swiftly following the ruling from the Supreme Court.
Calabria had been a proponent of quickly exiting Fannie and Freddie from conservatorship. Given the reaction of the market, it seems like the ruling came as a bit of a shock. The case is not completely finished and has been sent back to the lower courts, where investors can still argue their second claim regarding the difficulty of removing the FHFA director by the president.
But Elliot Stein, an analyst for Bloomberg Intelligence, said the Supreme Court decision effectively means that shareholders "can't recover the bulk of the overpayments they sought. The removal of Calabria is also likely not good for Fannie and Freddie shareholders, either, because it could make a full exit from conservatorship less likely, or at least a lot slower.
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