Who Are Fannie Mae and Freddie Mac?

If you hold a mortgage note you might feel like patting yourself on the back right now because of recent volatility in the conventional mortgage market. If you’ve followed the news you’ve probably heard about the misadventures of Fannie Mae and Freddie Mac. Who are they? What do they mean to mortgage note holders and sellers? Let’s talk about it.

Fannie Mae and Freddie Mac have funny names to match their strange histories. Fannie Mae’s more formal name is the Federal National Mortgage Association, or FNMA. The name “Fannie Mae” used to be a slang term for the FNMA acronym but it eventually became so widespread that the company adopted it as an official name. In 1970, the Federal Home Loan Mortgage Corporation (FHLMC) was split off from Fannie Mae and called Freddie Mac to match its cousin.

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs). Contrary to popular belief, GSEs are not wings of the federal government (or at least, they didn’t used to be – but read on . . .). They’re private corporations with federally mandated missions to broker mortgages. That means they work on the same profit motives as any other corporation and until recently, were not given any special government protection.

Unfortunately, investors often pretended Fannie and Freddie had special protection. This inflated their credit ratings. Both GSEs took big risks and accepted mortgage-backed securities that included a lot of subprime mortgages. Thanks to popular perception, few people questioned them.

One more thing: Fannie Mae and Freddie Mac back most American home mortgages. Can you see how this could all go horribly wrong?

Well, hindsight is 20/20. During the housing bubble, everybody was comfortable with business as usual. Then the bubble broke. Recently, the federal government decided enough was enough. Everyone knew that the GSEs had been flying on goodwill and hot air; the subprime correction tossed their stock onto the junk heap, but with so many mortgages riding on them, the government gave them a bailout.

What happened to private note holders? As far as their notes went, not much, though you can’t say the same about anything they negotiated through a financial institution. Private financing doesn’t take place under the auspices of Fannie Mae or Freddie Mac. Seller financing agreements stood alone and were never mixed with dodgy subprime contracts. Ironically, the bodies that were supposed to take away financial uncertainty made things worse, while private sellers did as well as their own, independent agreements would allow. That’s the advantage of a private mortgage note.