Seen On

Good Question: Who Are Fannie Mae And Freddie Mac?

(WCCO) There's a good chance that even though you write a mortgage check to your bank, someone else actually owns the loan. Fannie Mae and Freddie Mac own half of the nation's home loans, and they are in trouble. The federal government is pledging to rescue the mortgage giants, because they are so important. But who are Fannie and Freddie?

Let's start with who Fannie Mae and Freddie Mac are not. Fannie Mae is not a candy maker and Freddie Mac isn't a comedian. The two companies are the "biggest buyers of mortgages in the country," according to Alex Stenback, CTX Mortgage banker and author of BehindTheMortgage.com.

"Traditionally the banks, back in the day, used the money that they had on deposit from savings accounts, CDs, that sort of thing ... to lend for mortgages. But when the demand for mortgages goes beyond what the banks actually have on deposit, this whole secondary market was created," explained Stenback.

In 1938, the government set up the Federal National Mortgage Association. It's initials, F.N.M.A., led to the nickname "Fannie Mae."

In the late 1960s, the government set up a competitor to Fannie Mae, creating the Federal Home Loan Mortgage Corporation. That company was nicknamed "Freddie Mac."

Both names became so commonly known, that the companies officially changed their names to match their monikers. They are no longer nicknames.

Both companies are government-sponsored enterprises. They are corporations, traded as stocks, but chartered by the government. There's no official government guarantee to their operations, but it's implicit. And recently, the U.S. Treasury Department has proposed a set of conditions under which they might bail out Freddie Mac and Fannie Mae.

Here's how the companies operate: they buy loans from the banks that issue mortgages on a secondary market.

"It's not about taking the credit risks off the bank, [Fannie Mae and Freddie Mac] don't buy the trashy junk, they're buying prime grade stuff," said Stenback.

In fact, the companies set guidelines for issuing mortgages that set a standard.

"They buy them so banks can make more home loans. The banks need to have cash. All of the deposits in the country couldn't serve all of the demand for mortgages that are out there," explained Stenback.

Another benefit of the secondary market is to protect banks for wild swings in interest rates. If a bank is only collecting 5 percent interest on a home loan for 30 years, and at year 16 interest rates jump to 9 percent, that's a problem, because the banks would have to pay people who deposit money a much higher rate than what's being collected on the existing loans.

Fannie Mae and Freddie Mac make money by selling the loans the company buys again as bonds. They charge investors a "G-Fee" which guarantees that the bond holders will be repaid the principal of the loans.

Consumers never write a check to Fannie Mae or Freddie Mac, according to Stenback.

"Fannie and Freddie don't ever service mortgages," he said.

Instead, a handful of banks and mortgage companies collect payments from homeowners for a fee, and then pass along the rest of the money to Fannie Mae and Freddie Mac.

"They're the buyer of last resort, they're always a ready a buyer for these types of mortgages and if they were able to fail, and unable to buy these mortgages, the banks would soon not be able to lend anymore because they'd lend out all their capital," said Stenback.

On National Public Radio: Q&A: Behind Fannie's And Freddie's Stock Slides

(© MMVIII, CBS Broadcasting Inc. All Rights Reserved.)

---