Often the media refers Fannie Mae and Freddie Mac when talking about mortgages. So, just exactly what are these two entities, and what do they do?
Fannie Mae and Freddie Mac are intermediaries between lenders and companies that invest in mortgage-based securities. Officially, Fannie and Freddie are known as Government Sponsored Enterprises (GSEs), and they are overseen by the federal government.
GSEs are important to you
How does this affect you? Basically, whenever you get a mortgage, Fannie and Freddie are likely involved.
Your lender often gives you a mortgage with the intention of selling it to one of these GSEs. Fannie and Freddie take these mortgage loans, bundle them, and sell many of them to investors as what are called Mortgage Backed Securities (MBSs).
MBSs may contain thousands of mortgages and are generally categorized by criteria such as type of mortgage, credit profile of the borrower, or the term of the loan. They may be sold multiple times, as they often are traded from investor to investor.
The process is circular: Money flows from the investors to Fannie and Freddie, and ultimately to the lenders, who then fund additional loans with this money. The lenders then send these loans to Fannie or Freddie to bundle it and send to investors. Investors then send Fannie and Freddie more money to buy more loans.
Fannie and Freddie are also instrumental in the mortgage process in that they write the guidelines that both lenders and investors use when transacting loans.