What's the Difference Between Fannie Mae and Freddie Mac?
These bonds are sold mainly to institutions including mutual funds. Funds that have Ginnie Mae in their names must invest at least 80 percent of their assets in Ginnie Mae-backed securities. Ginnie Maes account for about 10 percent of the mortgage-backed securities market, says Dan Newhall , a principal with Vanguard Group. They buy mortgages from lenders that are not government insured but meet certain standards. Fannie and Freddie package loans into mortgage-backed bonds and sell them to investors. Fannie and Freddie also guarantee bonds that are packaged and sold by others, as long as the mortgages meet their standards.
Unlike Ginnie, Fannie and Freddie keep some bonds on their own books. They also buy and hold some mortgage securities packaged by others. Fannie and Freddie securities are found in a wide variety of bond funds including government-income funds, which are allowed to buy them even though they had no explicit government backing, at least until now.
Understanding Fannie Mae and Freddie Mac | PennyMac
That's not the case with Fannie and Freddie, although recent steps suggest that if they don't have the full faith and credit, they're pretty close. You can still lose money in a Ginnie Mae fund, Herbert adds.
If interest rates rise, the price of Ginnie Mae bonds and bond funds will fall. Conversely, if interest rates fall, bond prices will rise. Like all mortgage securities, they are also susceptible to prepayment risk.
If interest rates fall, many homeowners will refinance their mortgages and investors will get back their principal sooner than expected. Despite all the drama, Fannie and Freddie bonds haven't done much worse than Ginnie Maes.
Fannie Mae vs. Freddie Mac
In the past three months, a medium-term fixed-rate Ginnie Mae bond is down 0. Over the past 12 months, all three are up roughly 8 percent, Newhall says. Fannie and Freddie stockholders have fared far worse.
All of their profits go to the U. The conservatorship doesn't allow them to pay dividends. Fannie and Freddie buy their mortgages from different sources.
Fannie buys them from large commercial banks. Freddie buys them from smaller banks. They also offer different programs for those who can only make low down payments. Fannie Mae offers the Home Ready loan. Freddie offers the Home Possible program. It requires that applicants live in the home and no more than the area's average income. Fannie and Freddie origins and original purposes were also different. Fannie was created in to allow banks to create more mortgages.
It bought the loans from banks but then was more likely to keep them on its books. Freddie was created in as competition for Fannie. At that time, everyone thought that Fannie had enough cash to enable it to wait until the market improved. Experts believed it was too small a percentage of its overall portfolio to threaten the agency's viability.
- Fannie Mae vs. Freddie Mac: Similarities, Differences!
- What's the Difference between Fannie Mae and Freddie Mac?.
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