Fannie Mae/Freddie Mac

The names Fannie Mae and Freddie Mac are based on corporate acronyms; FNMA (Federal National Mortgage Association) and FHLC (Federal Home Loan Corporation).

Fannie Mae was founded in 1938, during the Great Depression, when millions of families were either unable to purchase homes, or were at risk for losing them.  Freddie Mac was created in 1970 and together, two entities have acted as the bridge between mortgage lenders and investors.  Basically they have repackaged home loans and created mortgage-backed securities, added government guarantees, and sold them to investors.

Because of the government guarantee that assured investors that the interest and principal would be paid–even if the original borrower couldn’t pay–the mortgage-backed securities from Fannie and Freddie had been considered “safe” investments.

The two companies were giants in the US housing system—they guaranteed or owned roughly half of all the $12 trillion US mortgage market. Almost all US mortgage lenders, from Citigroup to small banks, relied on Fannie Mae and Freddie Mac for low-cost mortgage funds.  But because many of the loans were considered sub-prime, or loans made to unqualified buyers, defaults led to a nationwide mortgage crisis. The ripple effect spread across the economy and both companies were taken over by the government. 

Below is a brief timeline.

1938: Fannie Mae, was founded as government sponsored enterprise to provide liquidity to the mortgage market.

1968: Fannie Mae was converted into a private corporation.

1970: Freddie Mac, was created to curtail Fannie Mae’s monopoly of the secondary mortgage market.

1971: Freddie Mac introduced first mortgage-related security.

2003: Freddie Mac was fined $125 million for underestimating earnings by $5 billion.

2004: Accounting scandal caused Fannie Mae to restate $6.3 billion in earnings.

2006: Fannie Mae executives were accused of manipulating the company’s book to maximize their bonus.

August 2007: Subprime mortgages triggered the current financial market crisis.

March 2008: Both companies received permission to add $200 billion into the mortgage market.

July 2008: Congress authorized the Fed to provide equity to Fannie Mae and Freddie Mac.

September 2008: Both Fannie Mae and Freddie Mac were taken over by the government and top management at both companies was dismissed.

November 2008: Both companies announced plans to reduce the loan burdens of homeowners facing foreclosure by modifying mortgages, reducing interest rates to levels no higher than 38 percent of the borrower’s monthly income. The program is proposed for people who are at least 90 days behind on their payments.