President Franklin Roosevelt’s New Deal established the Federal National Mortgage Association (Fannie Mae) in 1938 as a federal agency in the wake of the Great Depression. Its purpose was to bring liquidity, stability and affordability to the U.S. housing and mortgage markets. Congress converted Fannie in 1968 to a publicly held corporation to help balance the federal budget.

To compete against Fannie Mae’s domination of the secondary market and further lower housing costs, Congress chartered the Federal Home Loan Mortgage Corporation (Freddie Mac) as a public corporation in 1970.

Freddie and Fannie have similar Congressional mandates, charters and regulatory structures. Both entities buy mortgages from lenders and package them into mortgage-backed securities that are sold to investors with a guarantee against default. This creates a secondary market, allowing mortgage lenders to use the freed-up funds to make more home loans.

The Government National Mortgage Association (Ginnie Mae) was established by Congress in 1968. Unlike its GSE siblings, Ginnie does not purchase loans, but guarantees investors the timely payment of principal and interest on mortgage-backed securities containing federally insured loans — mainly FHA and VA loans.

In September 2008, the U.S. government rescued Fannie Mae and Freddie Mac from the brink of economic failure and placed them into conservatorship with the Federal Housing Finance Agency (FHFA). Some members of Congress have called for the gradual elimination of Fannie and Freddie to leave mortgage finance completely in the private sector. A Treasury Department report on the future of Fannie and Freddie will be delivered to Congress in the first half of February 2011.

Related articles

• Influential Proposal to Outline Fannie, Freddie Fixes (blogs.wsj.com)
• Big Banks Want Fannie and Freddie’s Government Backing (huffingtonpost.com)