Fannie Mae (FNMA) is an acronym for Federal National Mortgage Association.  It is a government sponsored enterprise (GSE) of the U.S. Government.  It was created in 1938 as part of President Roosevelt’s “New Deal” to provide money and liquidity to the mortgage market which collapsed earlier in the decade during the Great Depression.   It is a shareholder-owned corporation authorized to make loans and loan guarantees. 

Freddie Mac (FHLMC) is another GSE, founded in 1970, has the exact same functions and operates the exact same way as Fannie.

The main mission of Fannie and Freddie is to provide liquidity into the mortgage markets by purchasing loans made by local lenders and repackaging them into bond-market security pools that are sold to investors with the U.S. Government’s stamp of approval.  A simplified example is, I may get you a home loan with Wells Fargo at 6.5%——who then sells your loan with a bunch of others (called pools) to Fannie/Freddie for 6.0%, who sells them on Wall Street (called mortgage backed securities).  Wells Fargo collects your monthly payment (called servicing) for a fee; however, they’ve already sold your loan on Wall Street.  This loan is “guaranteed” by Fannie or Freddie, which is what makes our interest rates so low.  Without this flow of money (liquidity), our home rates would be, who knows, 2% to 4% higher, is a guess.

HISTORY

In 1968, to remove the activity of Fannie from the annual balance sheet of the federal budget, it was converted into a private corporation.  Fannie ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to Ginnie Mae (Government National Mortgage Association).  This entity falls under the guise of HUD and provides all of our FHA and VA loans—amongst others, such as Indian Housing and Rural loan programs.  In 1970, Freddie was founded to expand the secondary mortgage market and to combat Fannie’s monopoly.  When you hear the term “Conventional” loans, that means Fannie & Freddie, which are allowed to guarantee loans up to $417,000.  Anytime you hear “Jumbo” loans, those are loans greater than $417K, money comes from a smaller pool of non-Fannie/Freddie investors, thus Jumbo loans higher rates.

TODAY 

Fannie and Freddie own/guarantee over half of the $12 Trillion mortgage market.  There is a wide belief that these securities are backed by some sort of implied Federal Guarantee.  These days, Congress, The Fed, The SEC are all talking about how to keep Fannie and Freddie afloat if the foreclosure rate threatens their liquidity.  The big fear for our economy is if these GSEs will eventually be supported by U.S. Treasuries, then eventually, us tax payers.  Stay posted!!

Many of the programs that have been long available that allowed good borrowers to get 100% financing just got a lot more complicated.  Fannie Mae and Freddie Mac (the 2 congressionally sponsered entities that help people get loans) have now started labeling many, if not most, zip codes in the Arizona real estate market “distressed”.  The outcome of this change is that lenders then take 5% off of the highest allowable “loan to value”.  In other words, if Joe Borrower is approved for a MyCommunity mortgage that allows him to get 100% financing, the loan officer then runs his loan through the computer applications for Fannie Mae or Freddie Mac which gives Mr. Loan Officer the flag that tells them that this property is located in a defined distressed real estate market.  All of the sudden, Joe Borrower is required to make a 5% down payment in order to make this loan work.  This is also the case for home owners looking to refinance.  If your appraisal says that you have about 20% equity in your home and the computer flags your area, the bank will look at it as if you only have 15% equity and you will be forced to pay mortgage insurance.

What does this mean for you?  Simply put, if you are considering purchasing a home, FHA has more flexibilty so that you should only need the standard 3% down as long as you have a good solid appraisal.  Also, the down payment can be gifted from a family member.  You will have to pay an upfront mortgage insurance fee of 1.5% but it is financed in and the unused portion is refundable if you move out of the loan without defaulting (after being pro-rated).  If you are considering refinancing, factor in the possibility that your loan to value may be looked at by the lender as being 5% higher than you think it is.  Better safe than sorry.

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