The landscape of the US housing finance system has several key players that are often misunderstood: Fannie Mae, Freddie Mac and Ginnie Mae. These entities play a crucial role in the residential mortgage sector, providing liquidity, stability and affordability to the mortgage market. However, their structures and the nature of their government relations vary significantly.

Fannie Mae and Freddie Mac: Government Sponsored Enterprises

Both Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs). They were created by Congress to serve a public mission: supporting homeownership for middle-class Americans. Contrary to what some may believe, these entities are not government-owned, but rather publicly traded companies owned by shareholders.

Fannie Mae was established in 1938 during the Great Depression as part of the New Deal to stimulate the housing market. Freddie Mac was later created in 1970 to provide even more competition in the secondary mortgage market. These organizations purchase mortgages from lenders, bundle them, and sell them as mortgage-backed securities (MBS) to investors on the open market. This process is designed to free up capital, allowing lenders to offer more mortgages to potential home buyers.

Ginnie Mae: The Government Owned Counterparty

On the other hand, Ginnie Mae (Government National Mortgage Association) is a wholly owned government corporation within the Department of Housing and Urban Development (HUD). Established in 1968, Ginnie Mae's purpose is to promote homeownership by insuring mortgage-backed securities on loans insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service (RHS ) and the Office of Public and Indian Housing (PIH).

Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not buy or sell loans or issue MBS. Instead, it guarantees timely payment of principal and interest on the MBS, ensuring the liquidity and stability of the mortgage market.

The Conservatory of 2008

The 2008 financial crisis brought significant changes to Fannie Mae and Freddie Mac. Due to their critical role in the housing market and financial system, both GSEs were placed under conservatorship by the Federal Housing Finance Agency (FHFA) as they faced possible insolvency due to mortgage defaults and financial turmoil. This move effectively meant that the government took control of the companies to maintain their stability and continued operation.

Looking to the future

Today, discussions continue regarding the future of Fannie Mae and Freddie Mac. Proposals have been made to reduce their presence in the housing market, reform their structures, or even fully integrate them into the government. Meanwhile, Ginnie Mae continues its role as a stabilizer of mortgage markets, especially for loans that support housing for veterans and low-income families.

Conclusion

Understanding the distinctions between Fannie Mae, Freddie Mac, and Ginnie Mae is crucial to understanding how the U.S. housing finance system operates. While Fannie Mae and Freddie Mac operate under a congressional charter with private ownership, Ginnie Mae is completely government property. Each entity plays a vital role in ensuring Americans have access to home mortgages, although they do so in markedly different ways. As the housing market continues to evolve, so will the functions and structures of these pivotal institutions.