Fannie and Freddie

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Fannie Mae or Federal National Mortgage Association (FNMA)


(NOTE: September 7th, 2008, the US Government stepped in to take control of Fannie Mae and Freddie Mac.  This article will be updated as the details unfold).

Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America.  They do not lend money directly to home buyers.  Instead, they work with lenders to make sure they don't run out of mortgage funds, so more people can achieve the dream of homeownership.

 

Fannie Mae was created by Congress in 1938 to bolster the housing industry during the Depression.   At that time, Fannie Mae was part of the Federal Housing Administration (FHA) and authorized to buy only FHA-insured loans to replenish lenders' supply of money.

 

In 1968, Fannie Mae became a private company operating with private capital on a self-sustaining basis.  Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans. 

Today, Fannie Mae operates under a congressional charter that directs them to channel their efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans. Yet Fannie Mae receives no government funding or backing, and they are one of the nation's largest taxpayers as well as one of the most consistently profitable corporations in America.

 

Fannie Mae stock (FNM) today is actively traded on the New York and other exchanges and is part of the Standard and Poor's 500 Composite Stock Price Index.

 

They are the country's third largest corporation, in terms of assets, and the nation's largest provider of funds for home mortgages.  With a book of business that currently exceeds 12 million mortgages, Fannie Mae is one of the largest financial services corporations in the world.  And with approximately 4,150 dedicated employees, they are also one of the world's most productive corporations.

They don't lend money directly to home buyers, they ensure that mortgage funds are consistently available and affordable by buying mortgages from a variety of institutions that do lend money directly to home buyers.

 

The lenders with which Fannie Mae does business are part of the primary mortgage market -- the place where mortgages are originated and funds are loaned directly to borrowers. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies.

 

Lenders sell mortgages into what's called the secondary market -- the place where mortgages are bought and sold by various investors. Secondary market investors include Fannie Mae, various pension funds, insurance companies, securities dealers, and other financial institutions.

 

Once a mortgage is originated, lenders have a choice. They can either hold the mortgage in their own portfolio or they can sell the mortgages to secondary market investors, such as Fannie Mae. When lenders sell their mortgages, they replenish their funds so they can turn around and lend more money to home buyers.

 

Lenders can sell Fannie Me mortgages that comply with their guidelines and loan limits. Currently, Fannie Mae buys mortgages up to a loan limit of $417,000. This is in keeping with Fannie Mae's mission to help more low-, moderate-, and middle-income people buy homes. The loan limits are adjusted each year, in response to changes in housing affordability nationwide.

 

Fannie Mae operates exclusively in the secondary mortgage market, where they help to ensure that money for mortgages is available to home buyers in every state across the country, every day. And they do this in two ways. First, Fannie Mae pays cash for mortgages that they buy from lenders and hold those mortgages in their portfolio. The lenders, in turn can use that money to make more mortgages for more home buyers. Second Fannie Mae issues what are known as Mortgage-Backed Securities (MBS) in exchange for pools of mortgages from lenders. These MBS provide the lenders with a more liquid asset to hold or sell. Fannie Mae MBS are highly liquid investments and are traded on Wall Street through securities dealers.

 

In order to fund the mortgages they buy, Fannie Mae issues debt securities to investors. A significant part of their earnings are derived from the difference between the yield on those mortgages and the cost they endured to buy them. When Fannie Mae issues MBS, they guarantee that investors will receive timely principal and interest payments regardless of what happens to the underlying mortgages. In return for the guaranty, Fannie Mae earns a fee. These fees are another source of Fannie Mae's income.

 

As the secondary market leader, Fannie Mae's critical role in providing a steady stream of mortgage funds to lenders across the country is complemented by new technologies that make the process of buying a home quicker, easier and less expensive. They have developed automated systems that lenders are using nationwide -- which allows many of their home-buying customers to get approved for a mortgage loan more quickly and affordably than ever before.

 

Fannie Mae provides DU or DO for automated approvals, otherwise known as Desktop Underwriter or Desktop Originator.

If the loan does not get approved as conforming, often you will get a Expanded Approval Level 1, 2, 3 or 4.  The rate may be a bit higher, but you can get a loan.

Freddie Mac or Federal Home Loan Mortgage Corporation (FHLMC)

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages from lenders and packages them into securities that are sold to investors. By doing so, they ultimately provide homeowners and renters with lower housing costs and better access to home financing.

Since the Great Depression, federal support for housing has been an enduring public policy objective. Even in the late 1960s, interest rates varied widely from city to city across the country. The mortgage market was unpredictable, and loans were sometimes hard to get. Neither government nor private banking interests could address the nation's housing finance needs alone.

When Congress created Freddie Mac's charter in 1970, it set a clear mission for FHLMC: stabilize the nation's mortgage markets and expand opportunities for homeownership and affordable rental housing.

Over the past 30 years, Freddie Mac has accomplished this and more. They have done so not by making individual mortgage loans to consumers, but rather by ensuring that there is a continuous flow of funds to mortgage lenders. As a secondary market for mortgage loans, Freddie Mac purchases mortgages from lenders across the country and packages them into securities that can be sold to investors. Through this securitization process, they ultimately provide low- to middle-income homeowners and renters with lower housing costs and better access to home financing.

In addition to financing housing through securitization, Freddie Mac invests directly in mortgages. This investment is made possible by their ability to raise money to purchase mortgage assets by selling bonds to investors throughout the world. By providing investors with another means to indirectly invest in mortgages on homes within the United States, they provide families with even more affordable mortgage financing.

The combination of a Congressional charter and private-market discipline has allowed FHLMC to bring increased efficiency, stability and affordability to the market in all economic conditions.

Freddie Mac's Congressional charter forms the foundation of their business and the ideals that power their mission. The charter lays the framework for their business lines, shapes the products they bring to market and drives the services they provide to the nation's housing and mortgage industry.

Over the last 30 years, Freddie Mac has:

  • helped increase the homeownership rate in America to record levels

  • lowered mortgage rates, saving homeowners interest payments and reducing apartment rents

  • made home mortgage credit readily available, eliminating regional disparities

  • expanded the variety of mortgage loan products available

  • used technology to reduce the time and costs of obtaining mortgage loans

  • attracted investors from national and global capital markets to support America's future mortgage lending needs

 

Consumers' lives are better because they've been able to help them become homeowners and renters of affordable, quality housing. Homeownership in America has reached 67% today.

Freddie Mac's charter — and the mission set out for Freddie Mac by Congress — powers their drive to bring new mortgage products to the market, and to use innovation and technology to continue simplifying the mortgage process. The goal is simple: to open more doors for more people than ever before.

 

Freddie Mac provides Loan Prospector or LP for automated approvals.  If the loan is not approved as conforming, you may get an A- (or A minus) approval.