Fannie Mae and Freddie Mac: An Overview

If you’ve ever taken out a mortgage, chances are Fannie Mae or Freddie Mac played a role—whether you realized it or not. They’re both government-sponsored enterprises (GSEs) that buy residential mortgages on the secondary market to hold or (more often) bundle and sell as mortgage-backed securities (MBS) to investors. This replenishes lenders with cash to issue further mortgages, injecting liquidity, stability, and affordability into the housing market.

Today, Fannie Mae and Freddie Mac back most of the country’s 51 million residential mortgages. However, the two entities have a checkered past. They have faced significant challenges, from the 2008 subprime mortgage crisis to the pandemic-era forbearances and moratoriums. To fully understand their role in the housing market, let’s explore why they were established, how they evolved, and their future.

Historical Background

Before the 1930s, you typically had to put down 50% on a home mortgage and repay it in 10 years or less, making homeownership largely inaccessible. Then, to make matters worse, the Great Depression sent nearly one in four mortgages into default, triggering a housing crisis. 

Fannie Mae

In response, the federal government introduced a series of New Deal initiatives, including the Federal Housing Administration (FHA) that insures qualifying mortgages and the Federal National Mortgage Association (FNMA) that creates a secondary market for them. Chartered as a federal agency in 1938, the FNMA—soon to be known as “Fannie Mae”—initially bought, held, and sold only FHA-insured loans but began investing in VA loans in 1948.

In 1954, the Federal National Mortgage Association Charter Act converted Fannie Mae into a public-private, mixed-ownership corporation, exempting it from all state and local taxes, except real property taxes. Then in 1968, it was reorganized into a for-profit, shareholder-owned company and listed on the New York Stock Exchange (NYSE) while remaining under the regulation of the Department of Housing and Urban Development (HUD).

This marked the beginning of Fannie Mae operating with private capital while still benefiting from government support. The change aimed to reduce direct federal involvement in mortgage financing, allowing Fannie Mae to function more like a private financial institution while still providing long-term, fixed-rate mortgages. 

Freddie Mac

Two years later, the Emergency Home Finance Act of 1970 established the Federal Home Loan Mortgage Corporation (FHLMC) or “Freddie Mac.” It expanded the secondary mortgage market by purchasing mortgages from smaller savings and loan (S&L) associations. Furthermore, the law allowed both Fannie Mae and Freddie Mac to buy and sell non-government-backed mortgages for the first time.

After the savings and loan crisis of the 1980s, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 restructured Freddie Mac as a for-profit corporation, leading to its listing on the NYSE alongside Fannie Mae. Since then, the two enterprises have served similar functions, with one main difference: Fannie Mae buys its mortgages mainly from major commercial banks, while Freddie Mac buys them from smaller thrift banks. 

Functions and Operations

Neither Fannie Mae nor Freddie Mac originate or service mortgages. Instead, they buy them off private lenders, who use the cash to extend even more loans, widening mortgage access.

However, the two government-sponsored entities only buy loans that meet their criteria for loan size, loan-to-value (LTV) ratio, debt-to-income (DTI) ratio, borrower credit score, etc. Loans that meet these criteria are called conforming loans. In 2025, the conforming loan limit is $806,500 in most of the U.S. and $1,209,750 in some high-cost areas like New York City and San Francisco.

After purchasing mortgages on the secondary market, Fannie Mae and Freddie Mac pool them into MBS and sell them to investors—especially large institutional buyers such as pension funds and insurance companies—which injects further liquidity into the mortgage market. Meanwhile, the two GSEs guarantee the principal and interest payments on the MBS, making them a relatively safe investment with a credit rating close to that of U.S. Treasuries.

Government Sponsorship and Regulation

Fannie Mae and Freddie Mac are unique entities in their company structure. Their close relationship with the federal government gives them access to lower borrowing costs and more investor confidence due to an “implicit guarantee.” Many assume the government will intervene before letting the GSEs default, even though there is no explicit guarantee. Case in point: During the late 1970s and early 1980s inflation and recessions, the federal government helped Fannie Mae recover from its financial losses with regulatory forbearance and tax benefits.

However, this government backing comes with strict government oversight. For example, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 created the HUD’s Office of Federal Housing Enterprise Oversight (OFHEO), which is now the Federal Housing Finance Agency (FHFA). It’s authorized to conduct routine safety and soundness examinations of the GSEs and enforce necessary changes. Furthermore, the HUD requires the GSEs to meet annual mortgage purchase goals and dedicate a portion of their loans to low- and moderate-income borrowers. 

Fannie Mae and Freddie Mac’s congressional charters made them Government Sponsored Enterprises (GSEs). Though private, they had ties to the U.S. federal government that was thought to provide a financial backstop, with a line of credit from the U.S. Treasury for $2.25 billion. In September 2008, during the height of the financial crisis, they were placed under the direct supervision of the federal government.

During regular times, the government ties were less apparent but important. Each was a unique company unlike any other in the U.S. Here are some of the differences:

• The President of the United States appoints five of the 18 members of the organization’s boards of directors.
• The Secretary of the Treasury can buy up to $2.25 billion of securities from each company to support its liquidity.
• Their securities are considered “government securities” under the Securities Exchange Act of 1934.
• These securities did not have to be registered with the U.S. Securities and Exchange Commission.
• They could not originate mortgages, but they could buy them for securitization or investment purposes. In 2008, a year we’ll return to, the mortgage amounts were limited to $417,000, effectively closing them out of higher-priced real estate areas given their mission to target low—and moderate-income households.
• Both Fannie Mae and Freddie Mac are exempt from state and local taxes.
• The Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) regulate both companies.
• Should they face insolvency, this was not to be resolved through a bankruptcy process but by Congress.

The FHFA regulates, enforces, and monitors Fannie and Freddie’s capital standards and limits the size of their mortgage investment portfolios. HUD oversees Fannie and Freddie’s general housing missions.

Role in the 2008 Financial Crisis

In the years leading up to the 2008 Financial Crisis, Fannie Mae and Freddie Mac started investing in riskier loans, contributing to a housing bubble. In particular, they purchased large volumes of Alt-A mortgages, which had higher LTV and DTI ratios and often lacked full documentation of borrowers’ incomes. Furthermore, the GSEs bought private-label MBS collateralized by subprime mortgages, i.e., loans issued to borrowers with poor credit ratings.

When home values collapsed in 2007, defaults surged, and the MBS market unraveled. Fannie Mae and Freddie Mac lost billions of dollars on their portfolios and MBS guarantees, and investor confidence in them eroded. As their stock prices plummeted and insolvency loomed, the federal government intervened to prevent a wider economic fallout. 

In July 2008, Congress passed the Housing and Economic Recovery Act, establishing the Federal Housing Finance Agency (FHFA). Less than six weeks later, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, effectively bringing them under government control. The U.S. Treasury then bailed out the GSEs with $190 billion through Senior Preferred Stock Purchase Agreements, requiring dividend payments in return. In 2010, both entities were delisted from the NYSE and began trading over the counter.

Since then, Fannie Mae and Freddie Mac have repaid the U.S. Treasury and returned to profitability but remain under conservatorship. 

In addition, Fannie Mae changed its business model. Instead of relying on income from its retained portfolio, it began generating most of its revenue by charging guaranty fees for ensuring the timely payment of principal and interest on MBS. As a result, its retained portfolio shrunk by 90% since 2010, and its revenue derived from guaranty fees went from less than 25% to over 80% of its total revenue.

Response to the Pandemic

The pandemic posed an entirely different set of challenges for Fannie Mae and Freddie Mac. With many Americans facing job losses and financial uncertainty, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), introducing widespread homeowner protections. 

For example, federally-backed mortgages were granted the option to enter forbearance programs that paused or lowered mortgage payments for up to 180 days, with an option to extend for another 180 days—without late fees or penalties. Although 16% of mortgage holders used forbearance at some point between April 2020 and December 2021, most of them did it for three months or less. 

Meanwhile, federal and state-level moratoriums protected struggling borrowers and renters from losing their homes during the worst of the housing crisis. Under the CARES Act, lenders of federally-backed mortgages were prohibited from executing foreclosures until July 31, 2021. At the same time, the FHFA enforced more lenient lending and appraisal standards to help ensure buyers could still get into homes.

Naturally, the relief to federally-backed mortgage borrowers took a financial toll on Fannie Mae and Freddie Mac, which facilitated the effort with streamlined repayment plans, including deferred payments and extended loan terms. 

Current and Future Prospects

While Fannie Mae and Freddie Mac have since recovered from the pandemic, they remain under conservatorship. Some argue for privatizing the two GSEs to promote competition and shift risk away from taxpayers. However, others warn that privatization could lead to tighter mortgage credit, higher interest rates, and reduced support for low-income borrowers.

Privatization efforts have been proposed multiple times. In 2019, the first Trump administration released a Treasury plan outlining potential housing reforms, including an end to Fannie Mae’s and Freddie Mac’s conservatorships. However, this never materialized. 

Then in January 2025, the U.S. Treasury and the FHFA announced a framework to facilitate the orderly exit of Fannie Mae and Freddie Mac from government control, which involves soliciting public input and ensuring that the transition minimizes disruptions to the housing and financial markets. GSE share values jumped to multi-year highs at the news, reflecting investor optimism about the potential for privatization under President Trump’s second administration. However, President Trump has yet to propose a change, and some experts warn that ending conservatorship could take years, drive up interest rates, end the 30-year fixed-rate mortgage, and make the housing market more volatile.

For now, Fannie Mae and Freddie Mac play an important role in stabilizing the mortgage market and making it accessible to more Americans. 

Recently, the FHFA finalized its 2025–2027 housing goals for Fannie Mae and Freddie Mac, and according to the announcement, the GSEs must meet the following single-family loan benchmarks to support equitable housing access for low-income families and minorities: