Freddie Mac and Fannie Mae
While the entities of Freddie Mac and Fannie Mae have, for decades played a significant role in the acquisition of mortgages for the average home buyer, few know exactly what they do.
Fannie Mae also known as FNMA which stands for Federal National Mortgage Association.
Freddie Mac is known as FHLMC which stands for Federal Home Loan Mortgage Corporation.
Much of the attention and awareness that they have received by the general public was given to them as they were being taken over by the Federal Government in the wake of the mortgage meltdown of 2007-2008. In this article we will explore exactly what they do, and what role they play in the mortgage process today.
What Do They Do?
First, to understand what Fannie and Freddie do now, you need to understand the mortgage process, perhaps 50 years ago. At that time, banks lent money against the pool of money that they held in their deposit reserves.
They took in deposits and paid interest against those deposits at one rate, then lent money out in the form of mortgages and other loans, at another higher rate. The difference between the two was known as arbitrage and represented their profit.
Their capacity to lend money was limited by the amount of money they held on deposit at the bank. If they, using a very simple example had $1 million dollars to lend out as mortgage money, and houses cost $50,000, they could lend money to 20 people to buy houses. So far so good.
When that $1 million dollars was lent out to qualified borrowers, they had to wait until they either got more deposits to lend against, or one or more of the mortgages was paid off, through either the sale of the property, or through a refinance. Either way the banks were limited in what they could lend.
Loans in those days carried very high rates of interest and a 30 year fixed hadn’t even been invented yet. Most loans were only fixed for 10-15 years.
Enter Fannie and Freddie
Consider them like an intermediary between investors that want to buy mortgages and lenders that want to always have new money to lend to consumers to purchase and refinance homes.
They take money from investors and give it to lenders. Lenders then lend it to you, the mortgage consumer. After lending money to you, the lenders then send the mortgages back to Fannie and Freddie. Fannie and Freddie then bundle them together into what are called mortgage backed securities, then send them to the investors, who reward them with more money to be sent back to the lenders.
The actual security that backs your mortgage will be sold numerous times while the servicing entity you make payments to, will rarely change, these sales occur without your knowledge.
So What Happened?
In the 10-15 years prior to the meltdown, guidelines got progressively more loose. As lenders, using these guidelines were able to sell more loans to more people that were less and less qualified to have them, investors wanted to buy more and more of them, and they did. And if all of this weren’t enough excitement here in the US, investors worldwide wanted a slice of the American dream as well, fanning the flames even more.
When the combined factors of real estate values that began to plateau, and economic conditions that began to deteriorate, the walls of the mortgage industry that had risen so high for so long began to crumble. Investors worldwide felt the ripple of this event and entire economies everywhere felt the impact. The federal government wound up taking over Fannie and Freddie, to ensure that similar events never again happen.
While FNMA and FHLMC were not responsible for the most egregious lending practices that shattered the mortgage market, they did play their role by buying limited income verification loans. They never did fund true sub-prime mortgages with low credit scores and poor payment history.
In light of the events that happened to cause the mortgage meltdown, mortgage lending guidelines have been made significantly more conservative and many of the products that contributed to that event have either been eliminated, or modified so that worthy borrowers with a high likelihood of repayment will qualify and those who have historically shown to have poor payment histories are less likely to qualify.
However, it is so important that you understand the facts surrounding the mortgage market:
Banks and lenders are making mortgages!
There are many programs available, even if you are underwater.
First time home buyers are getting loans every day.
Interest rates are incredibly low.
There are special programs such as Homepath available that can help you buy a home.
You can buy a home, there has never been a better time!