Fannie Mae: Everything you need to know
Americans are fortunate to live in a country where the abiding forces of government in partnership with the private sector strongly believe in and advocate for homeownership. It’s not only a cornerstone of the American Dream, but the leading way to build and preserve generational wealth.
That said, not everyone initially sees a clear path to buying a home. Finances are tricky and obstacles can appear daunting to many prospective homeowners looking to obtain a loan.
Luckily, there’s a government-aligned corporation that’s designed to improve opportunities for individuals to secure affordable mortgage financing. It’s called the Federal National Mortgage Association (FNMA) or simply Fannie Mae.*
And while many people have likely heard the name Fannie Mae on the nightly news or seen it referred to in newspapers or business blogs, a sizable majority have only a vague notion of what Fannie does and how it provides value to homeowners.
With a mission to provide “liquidity, stability and affordability” to the housing market, Fannie Mae plays an important role in loan issuance, ensuring that banks and retail lenders like Guaranteed Rate can quickly fund loans to homeowners while following a set of approved guidelines that reduce their risk and provide market stability.
FNMA’s history
Fannie Mae and its sibling housing enterprise, the Federal Home Loan Mortgage Corporation or simply Freddie Mac, are government sponsored enterprises or GSEs. This strongly suggests that they are institutions of the federal government, but this is only partially correct. Admittedly, the distinction is murky.
Fannie Mae was officially created by Congress in 1938 during the depths of the Great Depression to help make home purchases more accessible to low- and middle-income buyers by increasing the supply of reliable funds available for home mortgages. At the time of inception, it was a wholly owned government entity; however, in 1968 Fannie lost its government-funded support and emerged triumphantly as a publicly traded company. In the coming years, Fannie would provide value to shareholders as well as the housing market.
Freddie Mac was chartered by the federal government in 1970 to serve as a private company competitor to Fannie Mae. Its aim is essentially the same as Fannie with one distinction: It purchases loans almost exclusively from smaller “thrift” banks and lenders, effectively serving the needs of a similar but slightly different clientele.
In the ensuing decades, Fannie continued to grow and fulfill its mission while returning profits to shareholders. Unfortunately, after a deluge of risky trades in the subprime mortgage market created historic losses as part of the financial crisis of 2008, Congress had little choice but to bail out Fannie (and Freddie) and subsequently put the company into conservatorship under the watchful eye of the FHFA (Federal Housing Finance Agency). Henceforth, Fannie would deliver all profits to the U.S. Treasury as part of the payback agreement.
While there is ongoing litigation challenging the legitimacy of this arrangement, the day-to-day business of Fannie Mae continues unabated to the ongoing benefit of lenders and homebuyers across the country. In today’s housing market, Fannie Mae (along with Freddie Mac) account for an estimated 66% of all home loans generated.
How Fannie Mae loans work
What does Fannie Mae do?
Despite its integral role within the mortgage industry, Fannie Mae does not provide direct loans to consumers. It’s not an originator and was never intended to be one. Instead, Fannie’s role is to work with large banks and third-party originators to establish a set of guidelines and requirements under which it will purchase and guarantee mortgage loans and provide liquidity to the market. With liquidity flowing and guarantees in place, lenders are more apt and able to provide the funds borrowers need to purchase homes and conduct refinances.
To put it another way, Fannie Mae mortgages provide the financing that underpins most conventional home loans throughout the U.S. By purchasing—and therefore guaranteeing— the vast majority of home mortgages, Fannie creates stability and security within the housing market while ensuring access to available capital.
All of this makes it easier for millions of people to to acquire a home, especially the many families and individuals who might otherwise be financially challenged when considering a home purchase. In addition, the popular 15-year and 30-year mortgages provide homebuyers with ample peace of mind, offering steady, predictable mortgage payments over the lifetime of the loan.
Without Fannie Mae’s involvement in the housing market, there would be less available capital and greater risk for lenders when issuing loans to homebuyers, risks that could jeopardize the daily flow of transactions and potentially paralyze the entire housing market.
Fannie Mae and the secondary mortgage market
Buying mortgages is only part of the story. Once purchased from the various lenders, these loans are bundled together in the form of mortgage-backed securities (MBS) and sold on the bond market.
As discussed, Fannie Mae purchases mortgages from banks or other lenders, using existing capital or borrowing on special authority from the U.S. Treasury. These transactions are considered part of the primary mortgage market.
The secondary mortgage market, or the open bond market, is where mortgage-backed securities are packaged together and traded, often as ETFs or mutual funds. Once Fannie has purchased the loan and fulfilled its obligations in the primary market, these conventional 15- and 30-year mortgages are converted into bonds, “pooled” together with other bonds with similar characteristics—sometimes hundreds or thousands of them— and then sold in the bond market to investors as a single security, an MBS. These investors are typically large institutions such as pension funds, investment banks and insurance companies.
Selling the securities to investors is what creates the secondary market and generates Fannie’s revenue. This is paramount to the business model and a defining component of Fannie Mae. However, it should be emphasized that this is the business of Fannie Mae—not the purpose.
Besides creating a massive stream of liquidity in the housing market, Fannie’s most important role is to guarantee the payment of the security, should the homeowner default on their loan. This provides necessary stability within the market. Guaranteeing fluidity in the mortgage sector—with the implicit backing of the U.S. Treasury— is as essential a function today as it was in 1938.
It’s worth noting that the guidelines and regulations that underwriters refer to while vetting prospective homebuyers are more clear, compelling and rigorous than at any previous period. That said, an MBS will always carry a certain degree of risk. It’s this small risk that both the lender, Fannie Mae (and ostensibly the Treasury Department) are willing to take in an effort to fulfill the original chartered mission of providing the necessary liquidity to expand the U.S. housing market and increase accessibility to first-time homebuyers.
Yes, Fannie Mae owns your loan
To obtain a Fannie loan, borrowers need to work with an approved lender who will adhere to Fannie Mae guidelines and also comply with the Statement on Subprime Lending issued by the federal government. Fannie Mae only purchases conventional loans once the mortgage has closed.
Loans sold to Fannie Mae are not guaranteed by the federal government. However, most of these loans are referred to as “conforming loans,” meaning that they conform to Fannie’s guidelines, including maximum loan amounts.
Each year, the FHFA sets conforming loan limits using an established formula as part of the Housing Economic and Recovery ACT (HERA). For 2021, loan limits increased to $548,250 in most regions within the US, with higher loan limits up to $822,375 in certain high cost markets.
Fannie Mae guidelines
Fannie Mae has several loan requirements and basic guidelines that borrowers must meet in order to obtain a loan. They include the following:
- Down payment: When it comes to down payment, homebuyers seeking to purchase a single-family home (primary residence) can expect to put down as little as 5%. This means the maximum LTV (loan to value) ratio is 95%. This will not result in a particularly favorable interest rate, however. The best interest rates require down payments of 40%.
- Debt-to-income ratio (DTI): This ratio measures monthly income in proportion to monthly debt, or recurring expenses. This is crucial to procuring a Fannie Mae loan and it’s recommended that the ratio not exceed 45%, although there are some instances where consumers can still qualify with a DTI of 50%.
- Credit score: In order to obtain a loan, Fannie generally needs to see an average FICO score of 620 or higher from the three major credit agencies—TransUnion®, Experian™ and Equifax®.
- Reserves: Depending on credit score, DTI ratio and LTV, borrowers may need to show cash reserves equal to two months to six months of mortgage payments. This is a prudent bulwark against a borrower’s sudden loss of income or other financial hardship they may experience.
Fannie Mae programs and credit options
Fannie Mae offers borrowers and even some renters a range of tools, programs and credit options to make the home mortgage experience easier to navigate and more affordable. Some of the most popular include:
- HomePath: In the unfortunate event of a foreclosure, Fannie Mae seizes control of the home. These are called Real Estate Owned homes (REO) and the stated goal is always to resell them as quickly as possible to retain the vitality of the neighborhood. This is done on homepath.com.
- HomeReady: This is a product designed for low to moderate income homebuyers with credit scores 620 and above who are looking to secure a mortgage with a low down payment. If they qualify under the program guidelines (which include all borrowers listed on the contract not making more than 80% of the area median income between them), they’re eligible for down payments as low as 3%.
- Fannie Mae Mortgage Loan Lookup: Fannie Mae has an online loan lookup tool to determine if your mortgage is owned by Fannie.This is important because of the many challenges facing those dealing with the income uncertainties. If Fannie owns your loan, you may be eligible for certain payment relief programs. Contact your servicer for more information.
Loan modification
Born out of the ashes of the 2008 financial crisis and increasingly important in the pandemic era, Fannie Mae’s loan modification program is intended to assist homeowners by adjusting their monthly mortgage. By modifying the interest rate, the terms of the loan or the monthly mortgage payment itself, eligible homeowners can decrease their payments. Since September 2008, loan modifications on behalf of Fannie and Freddie have helped over 2.4 million residents stay in their homes and avoid foreclosure.
In conclusion
The essential mission of Fannie Mae has long been a noble one. Now, as Americans confront both the continuing uncertainties of a pandemic and a volatile economic trajectory, it’s reassuring to know there’s a government-sponsored enterprise fighting to make the housing market more secure, affordable and less prohibitive to entry. Fannie Mae’s unique ability to generate liquidity quickly and increase home borrowing is unmatched. Coupled with its tools, technology and generous relief programs, Fannie is rightfully acknowledged as an innovative solution-centric company working on behalf of borrowers, lenders and the inextinguishable American Dream of homeownership.
*Guaranteed Rate is not affiliated with Fannie Mae or any government agency.
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