Red Sox/Yankees, Steelers/Ravens, Duke/UNC, Joe Frazier vs. Muhammad Ali, Lakers/Celtics, Michigan/Ohio State, Arnie & Jack, and… wait for it… Fannie Mae vs. Freddie Mac.
Competition. Our society can’t get enough of it. We have to admit it: human beings are somewhat animalistic in our competitive nature. We might as well throw you vs. me on the list, because that’s just how we operate.
In residential and multifamily real estate, Fannie and Freddie are the two behemoths that provide liquidity to the marketplace. In this piece, we’ll pit them against each other for a blow-by-blow comparison between the two stalwarts of multifamily capital. Before we delve into what makes them different, let’s start with an overview of what actually unites them.
Fannie & Freddie: What Are They?
Fannie Mae (technically, the Federal National Mortgage Association) and Freddie Mac (otherwise known as the Federal Home Loan Mortgage Corporation) are Government Sponsored Enterprises (GSEs) that the United States government created to ensure stability and affordability in the nation’s housing market. They are focused on doing this to both the nation’s single family and multifamily housing stock.
These GSEs accomplish the goal of stability and affordability primarily by providing liquidity to mortgage lenders: they purchase loans from banks and other lenders so that those institutions can turn around and use the funds to make more loans. They also create a market for investors in mortgages by pooling these loans together and sell them off to institutional fixed-income buyers. By increasing the supply of capital flocking towards the American mortgage system (in both single family and multifamily properties), these institutions lower the interest rates on mortgages across the country, thereby improving affordability.
Fannie and Freddie also support these markets by directly providing mortgage capital for large loans to multifamily lenders. In doing so, they have effectively outsourced the “marketing” functions of finding borrowers to lenders, and they simply provide the capital for loan fundings. They also support the housing market at large by playing a heightened accommodative role in times of crisis, such as in the Global Financial Crisis in 2008 and, more recently, the COVID-19 recession.
Today, they are both for-profit entities that are owned by shareholders, but they operate under charters that were established by Congress. In many ways, these entities are similar, and we could talk at great length about the ways in which they mirror and compliment each other. But, it’s much more fun to highlight their differences -- so let’s get ready to rumble.
The Showdown: Fannie vs. Freddie
As in all classic heavyweight battles, we’ll want to compare and contrast our two contestants on traditional metrics that will determine the best athlete: strength, agility, smarts, and temperament. Let’s look these two up and down and see who we should put our money on.
Strength - Who’s bigger?
This one is simple: Fannie’s bigger. As of March 31, 2021, Fannie Mae had $4.1 trillion in assets compared to a measly $2.7 trillion for Freddie Mac. In the first quarter of 2021, Fannie generated net income of $5 billion compared to Freddie’s $2.7 billion. If you believe it’s the size of the dog in the fight and not vice versa, you want to bet on Fannie. Granted, Fannie was founded a good 30 years prior to Freddie, so she’s had a little bit longer to build up that balance sheet -- but that’s moot since we just care about who’s bigger. Should this actually impact a borrower’s decision on a multifamily investment loan? Probably not, since these are both gargantuan institutions with similar infrastructure, capabilities, regulation, etc. Nevertheless…
Agility - Who’s faster?
All right, now this one is a little bit more subjective. Generally speaking, both of these agencies run on pretty similar timelines in terms of loan execution, and this can vary based on the specific loan program. That said, they do operate differently as it relates to underwriting. Whereas Freddie tends to want to control things a bit more and do the underwriting themselves, Fannie tends to lean on more of an empowerment framework. They delegate most of the underwriting into the hands of “DUS” (“Delegated Underwriting and Servicing”) lenders, which allows for more flexibility in the process of moving a deal forward. This also allows for fewer late-stage surprises for borrowers, since Fannie isn’t likely to suggest material changes to the underwriting at the eleventh hour. So…
Wisdom - Who’s smarter?
Despite the fact that Fannie has some years on her little brother, we’re giving this one to Freddie because of its significant investment into technology and innovation. Although Fannie has a longer history of serving small multifamily real estate borrowers, Freddie has shown more propensity to innovate since emerging on the scene with its Optigo small balance loan program. Through the creation of its Multifamily Innovation Lab, Freddie Mac is putting time, money, and effort into determining how it can best serve its customers. If you’re looking for the guy that’s spending endless hours in the gym working on his upper cut, your money should be on Freddie.
Temperament - Are you a ball hog?
Temperament matters. Nobody wants to select a “me first” player with the #1 pick in the NBA draft, because they won’t mesh well with teammates and their growth will be capped. Well, when it comes to picking an agency lender… ok, so this is a bit of a stretch.
Both agencies are great to work with. They’re both large institutions with boxes to check, but Birgo Capital has to give the nod to Freddie Mac on this one. Freddie is generally more willing to grow with borrowers with less track record, particularly through their Small Balance program. This program is what enabled Birgo Capital to grow a meaningful portfolio quickly but carefully, and while today we’re happy to work consistently with both agencies, Freddie’s temperament of flexibility with less experienced borrowers proved invaluable to Birgo in our earliest days. This one’s admittedly a bit sentimental, but…
We know you saw this one coming.
It’s a tie.
There can’t be a winner, because if we pick one of them, then the other will probably stop lending to us. And that would be bad for business. Our recommendation? Pit them against each other, time after time after time! Borrowers should always get quotes from both agencies -- we’ve seen them have wildly different, and sometimes inexplicable, perspectives on the same deal many times. Birgo Capital is incredibly grateful that they exist, as they both are aligned with our mission and live out their purpose with excellence. Fannie, Freddie -- we salute you!