What Are Fannie Mae & Freddie Mac Mortgage Lenders?

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) were created to provide a secondary market to buy closed loans from banks and lending institutions to insure continuous funds for homeloans.. These loans must meet certain criteria (maximum loan amount, debt ratios, credit scores, loan to value percentage they will lend, and other restrictions) to be eligible to be purchased. Loans that fit the criteria are called "conforming" loans, meaning that the loans conform to these guidelines. These loans are also considered to be Conventional loans, since they are not Government-backed.

What is a Secondary Market, and What do FNMA and FHLMC do?

Fannie and Freddie do not actually fund loans to customers. Their focus is on making sure there is accessible funds for loans by standardizing how the loans are approved making them eligible to be bought by a secondary market funder. A secondary market is made up of groups of banks and financial institutions large enough to buy up closed loans to service. These closed loans may be combined into huge dollar value bundles and sold off on Wall Street. The borrower/homeowner is then notified of who to make payments to in the future. The buyer of the mortgage usually becomes the servicer (who the customer makes payments to).

Why is Selling Loans Beneficial?

The initial funder of your loan may not be the bank that will service your loan. Your funder could be a small bank or not a bank at all. Brokerages have a variety of banks and financial organizations through which to fund loans for their customers. This type of mortgage business works from a lender's wholesale side. Since brokerages are connected with many banks, a person with a troublesome credit history or other situation is better served to work with a mortgage broker. By comparison, a bank will only have its own menu of loans. The funder of the loan will, many times, immediately sell the loan. The buyer of that loan may also resell it to increase cash flow. When the monies lent to you are replaced, they are freed up to loan to someone else. In short, the selling of loans keeps the money flowing and available.

FNMA and FHLMC History

Fannie Mae was created in 1938 during the Great Depression to give the market more variety in lending. Fannie Mae wrote guidelines that could address higher loan amounts than FHA (Federal Housing Authority) loan limits, thus reaching a broader sector of home buyers. As time went by, the need arose to make more money available for housing. In 1968, after interest rates had fluctuated wildly, Congress chartered Freddie Mac to stabilize the housing market. Its role to implement buying mortgages beyond traditional government loan limits opened up more possibilities for homeownership and for affordable rental housing. Freddie Mac also raises capital to buy closed loans.
Fannie Mae and Freddie Mac created automated underwriting for the mortgage industry, which determines if a loan is approved in advance of processing. This is a major efficiency development in getting loans to closing faster.

FNMA, FHLMC Programs and Loan Amounts Expanded

As real estate values have increased over the years, conforming loan amounts on one to four unit residential properties have increased to meet the needs of all types of buyers. The basic guidelines have not changed much, but the programs offered have. There is a 40-year, a 30-year and a 15-year fixed rate program as well as (ARM) Adjustable Rate Mortgage programs.There are 1-year ARMs, a 3/1, 5/1, 7/1 and a 10/1 ARM which allows for a freeze period before the rate adjusts. A 3/1 freezes for 3 years before becoming a 1 year ARM. These loans are attractive to buyers who may not be in the home long-term. A young family buying a first home may take a 5/1 ARM in the belief that they would not keep the home more than 5 years. These loans were all created by Fannie Mae and Freddie Mac.

FNMA and FHLMC: Future Uncertain

Fannie Mae and Freddie Mac have been able to stabilize affordable housing in the U.S. by offering standard underwriting guidelines to use in funding loans. They have helped to keep mortgage rates low, making payments and rents affordable. Since the industry became computerized, they have created and implemented software to speed the lending process, and have opened up more ways to keep money flowing so that lenders can keep making loans. Overall, the mission was accomplished. However, guidelines are just guidelines, not "carved in stone." Banks knew that if they were meeting basic criteria, they could fund a loan of lower quality and know that it could be resold. Some of the loan programs were untraditional in nature with risky features. This, combined with fraud in the industry, caused a huge level of poor performing loans--which led to an enormous amount of foreclosures. Since these loans were backed by Fannie Mae and Freddie Mac, the giants were rolling in losses, forcing them to look at bankruptcy. The federal government announced that it was bailing out the giants and taking over their loans. The Federal Housing Finance Agency was created to "shore up confidence" in Fannie Mae and Freddie Mac.