Fannie Mae

Fannie Mae is the name of one of the two government-sponsored enterprises (GSFs) that work in the mortgage market. The other is known as Freddie Mac. They were at one time fully owned by the government but it was thought that putting them partly into the private sector would increase their efficiency. They still receive considerable support in the form of implicit guarantees on their debt.

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What Fannie Mae does is buy up mortgages from lenders and make them into pools. The bank or other lender that you get your mortgage from might only hold it for a few days before selling it on. They will still be responsible for collecting your payments, of course, but the loan is added to one of those pools of mortgages. This is done so that risk can be shared amongst many investors. No one really knows if you, or any one single borrower, will have problems with the mortgage loan, pay it off early or refinance. But with a pool of hundreds of thousands of loans, these risks can be calculated. Investors can then buy into one of these pools managed by Fannie Mae.

Another way of looking at this is that Fannie Mae helps savers, other people’s 401(k) funds, their pensions and insurance policies, lend you the money to buy your home. But instead of you having to go to them individually, Fannie Mae is in the middle, doing the organizing and guaranteeing things. Along with the government guarantees this makes the interest rate you pay about 0.25% lower than it would be without Fannie Mae.