Before we get started with the differences, it is important that we understand what Fannie Mae and Freddie Mac are. They are basically two companies that are owned by the government, so the housing market can get a boost. Their difference lies in their range of products, the way they began, and their target market. Fannie Mae gets its mortgages from retail banks, whereas Freddie Mac gets it from thrift banks.
Fannie Mae was created by the Roosevelt Administration as a government agency, back in 1938. They acquired the FHA loans and by the year 1968, they became a government-sponsored enterprise (GSE). Being a GSE meant that Fannie Mae was owned by its stockholders but the loans were still being guaranteed by the government.
Fannie Mae was created by the Congress with the help of the Federal Home Loan Bank Act. This helped in creating a secondary market for mortgages that were ensured by the Federal Housing Administration (FHA). President Roosevelt wanted to help the people with their dream of owning a house with the help of Fannie Mae. In 1968, Fannie Mae was changed into a company and it starting selling stocks to shareholders because the congress needed money for the Vietnam War.
Freddie Mc was created by the Nixon Administration as a GSE back in the year 1970. They had all sorts of loans but not the FHA. These loans were not guaranteed, which is why Freddie Mac wanted to transfer the risk of default. This was done by grouping together similar loans in the mortgage-backed securities (MBS and were then sold to investors). These included pension funds and hedge funds. Freddie was created so that it could compete with Fannie Mae. Later on Fannie Mae was given the right to buy the FHA loans and sell them as MBS.
The main focus of the Freddie was to create 30 year mortgages. Since people became too tied up for a long time, this was very risky for a lot of people.
The best part about both of them is that they make homeownership possible for hundreds of people. One thing that you should know is that these are government sponsored loans, which is why they are profitable for the stakeholders and are also creating a secondary market where the resale of mortgages is easier.
In 2008, both Fannie Mae and Freddie Mac starting guaranteeing more sub-prime mortgages, just to reassure the housing market. It was revealed in 2007 by the Office of Federal Housing Enterprise Oversight, that Fannie and Freddie were providing 90% of the financing of the mortgages. This was almost double their percent in the mortgage market, which showed that private mortgage financing was not that functional. After the recession of 2008 hit America, banks refused to give people loan without Fannie or Freddie guarantees.
Coming to the main question, what is the difference between Fannie Mae and Freddie Mac? Well, they are very similar in a lot of ways, because both of their aim is to promote stability, affordability, and liquidity in the mortgage market but there are still some differences. The biggest difference is that both of them were started for different reasons. Fannie Mae was created by President Roosevelt, in order to purchase mortgages from private companies, so that lending could be encouraged during the time of the Great Depression. Freddie Mae was created much later and its main aim was to increase the availability of the loans.
As a buyer, you would never come in direct contact with Fannie Mae or Freddie Mac. However, it is important to know that there are a number of advantages that are offered by both of them. They are: