Who are Fannie Mae and Freddie Mac

Monday, July 14th, 2008

Fannie Mae & Freddie Mac have been in most major newspapers including The Wall Street Journal over the past couple of days but who are they and what do they do? If you Google Fannie Mae you are as likely to get the Chicago chocolate company Fannie May as you are the financial institution Fannie Mae. 

Fannie Mae and Freddie Mac have essentially the same federally charters which is to provide a market for your bank to sell their loans to. Once banks generate a loan they usually sell the loan in the secondary market to either Freddie or Fannie. Banks sell off the loans so they have a fresh supply of money to lend to someone else.

Both Fannie or Freddie are corporations owned by stockholders, not federal institutions. Once they buy have a portfolio of loans they package them into bonds and sell them to investors.  The bonds are guaranteed by Fannie or Freddie so investors feel comfortable buying them.  After the sale they have new money to buy loans from banks and the circle goes on. 

This system has worked well for years but with the financial crises in the United States both Fannie and Freddie are having problems raising enough capital to fund new loans.  This is why they have made newspaper headlines, the Fed is coming to the rescue by offering to lend them money and may even purchase some of their stock if needed. 

Warren Carreiro, Broker
warren@RealtyOfMarin.com