“Fannie Mae” and “Freddie Mac” are playful names for two very important companies that have been in the news recently because of a steep increase in defaulted mortgages and foreclosures during these challenging financial times: the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), respectively. Together, these two behemoths virtually control the U.S. secondary mortgage market and close loans totaling in the trillions of dollars. You've no doubt seen their names, especially if you’ve been shopping for a home loan. So what exactly are Fannie Mae and Freddie Mac and how do they help home buyers?

Fannie Mae and Freddie Mac operate as mortgage-financing lenders in what is called the secondary mortgage market. In other words, these two companies work behind the scenes, doing business with mortgage lenders, rather than homeowners directly. Though Fannie Mae and Freddie Mac are not governmental agencies, they both operate under congressional charters that mandate they provide funds for the financing of low- to middle-income housing. The companies fulfill this mission by acting as intermediaries between lending institutions and securities buyers. Fannie Mae and Freddie Mac purchase qualified mortgages from lenders and then repackage these loans and sell them as Mortgage Backed Securities (MBS). By purchasing these mortgages, Fannie Mae and Freddie Mac provide lenders with the capital they need to make more loans to home buyers. It is this consistent supply of available funds — over half of home mortgages are sold in the secondary mortgage market — that makes it possible for lenders to provide many more people with mortgages than would otherwise be possible.

Since Fannie Mae and Freddie Mac must operate within their mandate to increase housing opportunities for low- to middle-income Americans, the two companies cannot buy mortgages over a certain amount. Home loans that fall within the eligibility limits for purchase by Fannie Mae or Freddie Mac carry a “conforming” rate; mortgages with higher values carry a “jumbo” rate. On average, though the difference between the two rates is one quarter of one percent, that difference can add up to a savings of thousands of dollars over the life of a 30-year mortgage.