Fannie Mae and Freddie Mac

Many people have heard of Fannie Mae and Freddie Mac. Some people have even heard of the secondary mortgage market. Relatively few people, however, understand what these organizations are or how the secondary mortgage market affects market interest rates on home loans.

Fannie Mae and Freddie Mac are both private corporations. That means that they companies that are owned by shareholders. They are not, as many believe believe, funded by the government. Both companies were chartered by the government, but they are not federally administered.

Fannie Mae and Freddie Mac do not make loans to people who are trying to buy houses. Instead, they buy mortgages from direct lenders. This line of business is called the secondary mortgage market. While borrowers do not have any direct interaction with the secondary market, the market affects consumer loans in many ways.

Confused yet? It’s simpler than it sounds. Basically, you borrow money from a lender for your mortgage. Fannie Mae and Freddie Mac proceed to buy that mortgage from your lender. Your mortgage lender then has more funds to lend other borrowers. In this way, there is always money for new loans. If Fannie Mae and Freddie Mac did not exist, lenders could not possibly keep up with consumer demand.

Furthermore, these organizations have helped borrowers in other ways. The secondary mortgage market has helped to stabilize interest rates across the nation, minimizing regional differences. It has also helped encourage the acceptance of borrowers with diverse financial backgrounds

After Fannie Mae and Freddie Mac buy mortgages from lenders, they form securities and sell them to investors. That is how the companies make a profit for their shareholders.