Fannie Mae and Freddie Mac are what are known as “government-sponsored enterprises” (GSEs).  A government-sponsored enterprise is an organization receiving support from the Federal Government, but that also takes on some public responsibilities.

Why Were Both of These Organizations Formed?

Fannie Mae was created in 1938 and Freddie Mac in 1970 in order to increase access to home loans.  Originally, both were created to be publicly traded corporations, and at one time had an obligation to maximize shareholder return.

In 1968, Fannie Mae was converted to a privately held corporation so that its financial aspects could be removed from the federal budget.

In 1970, Fannie Mae was authorized to purchase private mortgages.

In 1992, President Bush, in conjunction with the House and Senate, signed the Housing and Community Development Act into law.  Basically, the new law forced Fannie Mae and Freddie Mac to help encourage affordable housing prices for low and middle-income families.

Initially, the goal was to have low and middle-income mortgages account for 30% of all mortgages backed by Fannie Mae and Freddie Mac, with that number increasing to 55% in 2007.

What do Fannie Mae and Freddie Mac Do?

These organizations purchase mortgages created by Utah mortgage companies and other lenders.  Both organizations have defined certain mortgages to be “conforming mortgages,” which just means each organization purchases mortgages that meet its underwriting standards.

In 2003, law limited the amount of a “conforming mortgage” to $322,700, and this limit rises a little bit every year.  Fannie Mae and Freddie Mac currently own roughly 80% of home loans that are not sponsored by the FHA/VA.

What was Their Role in the 2007 Mortgage Crisis?

Unfortunately, because of this dual obligation to help people with homes, but also to maximize shareholder return, many financial experts believe Fannie Mae and Freddie Mac share a large part of the responsibility in causing the real estate housing bubble of 2007.

It is difficult to pinpoint the role of both organizations in the 2007 real estate collapse, but without a doubt, you can point to some things they were doing wrong.

In 2000, for example, HUD reassessed the housing market, and created anti-predatory lending rules by not allowing the organizations to make risky, high-cost loans count towards affordable housing goals.

Unfortunately, in 2004, the rules were dropped.

Fannie Mae President and CEO Daniel Mudd maintained innocence, claiming it held safe lending standards, which actually pushed potential borrowers into finding private mortgages that were outside of their ability to pay.

In order to increase shareholder returns, both organizations began buying and guaranteeing high-risk loans in order to please Wall Street analysts.  They built up nearly $5 trillion in loans, with very little liquid cash available to back it up.

Six former executives are being charged with securities fraud for misleading the general public in regard to its subprime lending practices.  “Subprime” simply means lending to people who are likely to have difficulty repaying the mortgage in the future.

It Gets Even More Complicated Than This

Some experts have noted that because of the complexity of the business models and the accounting methods used by these organizations, it may be difficult to actually prove any legal liability!

Hopefully this article was simple enough to give you an idea of how these organizations work, but not so complicated that you’re completely lost!

If you’re interested in a Utah mortgage, you can rest assured, however, that most Utah mortgage lenders are honest and interested in helping you find the best you home you can safely afford.