The big names in home buying – mysterious figures or the industry’s best friends?
Did you know that in the 1930s, in order to get a mortgage to buy a house, you needed to put between 50% to 80% down. Not only that, if you got a loan, you would have to pay it back in five to seven years. This made the dream of homeownership unattainable for most Americans.
Banks operated this way to protect their cash reserves. The problem was that once a bank loaned money to a borrower it could not easily replenish their cash reserves. This meant the bank needed to wait until the mortgage was paid back by the borrower before they could use that money to make a new loan.
Eventually, the United States government created two organizations (Fannie Mae and Freddie Mac) to establish a market where banks could sell their mortgages. This way, when a bank loaned a homeowner money for a house, the bank could now sell that loan to Fannie or Freddie and get their money back.
Once the bank got their money back from selling the loan, they could then use that money to make a new loan to somebody else. This created more liquidity in the home mortgage market so banks could make more loans to more people.
Fannie and Freddie not only helped the banks, but they also helped borrowers. They created guidelines that lowered down payment requirements and lengthened the payback periods. No longer did a buyer need to put 50% down and pay off the mortgage in seven years. Now borrowers could put 20% down and pay it back over 30 years.
As a result of Fannie and Freddie and the ever-growing home market, the United States quickly became a country with more homeowners than nearly any other nation. In doing so, Americans put down roots, became invested in their communities and achieved a higher standard of living.
As home prices appreciated, so did the homeowners’ net worth. They could use the equity to fund higher education, provide savings for retirement, or pass on the wealth to their children.
One hidden aspect of homeownership is that it gives people the space and capital to dream. The list of companies that started in American basements and garages is staggering. Hewlett Packard. Nike. Walt Disney. Bill Gates. Steve Jobs. Jeff Bezos. Even today, who knows how many future inventions are currently being cooked up in someone’s home.
There’s certainly a lot of talk about government and what it does right and what it does wrong. One thing it really did right, that has contributed greatly to American homeownership, is the creation of Fannie Mae and Freddie Mac.
How did Fannie and Freddie get their names?
Like many things related to the Federal government, the names Fannie Mae and Freddie Mac don’t make a lot of sense, at least on the surface.
Created in 1970, Fannie Mae was known as the Federal National Mortgage Association, or FNMA. With a little imagination it’s not too hard to see how the acronym began to be voiced as Fannie Mae.
The name Freddie Mac made more of a leap from its acronym to nickname. Officially named the Federal Home Loan Mortgage Corporation, or FHLMC, it somehow morphed into Freddie Mac.
I guess the bureaucrats needed to humanize the original tongue twisting names.
Most Americans have heard the names Fannie and Freddie, however, they do not know what they do. In essence, they made homeownership available to middle class America and this led to an endless number of Good Things Happening in our society. Thank you Fannie and Freddie.
