What is Fannie Mae?
Along with "Freddie Mac," "Fannie Mae" is one of those names you'll see over and over when you start looking into buying a home, but what is Fannie Mae? And how does she help you buy a house?
Like Freddie Mac, Fannie Mae is an organization, not a person, and while it does not directly provide you with your loan, there's a good chance that it's thanks to Fannie Mae that you were able to get the loan in the first place.
What Does Fannie Mae Do?
The Federal National Mortgage Administration is the original entity created by the federal government in 1938 as part of President Roosevelt's New Deal to get more money circulating through the housing market and make it easier for families to get loans. It's commonly known as Fannie Mae just as the similar Federal Home Loan Mortgage Corporation, created in 1970, is known as Freddie Mac.
Today, if you get a loan to buy a house, it will probably be for a term of 25 or 30 years. However, back before Fannie Mae was created, banks simply couldn't afford the risks of loans with these kinds of timelines. That meant housing loans were for periods of time more like 10 years, and family homes would sometimes be repossessed at the end of that 10-year period when the loan still wasn't paid off.
When Fannie Mae was created, that all changed. By participating in the secondary mortgage market, Fannie Mae made it possible for people to get loans that they had a much longer period of time to pay off. Fannie Mae was able to guarantee loans, get more money circulating through the system and introduce more liquidity. This opened up the housing market to many more people than had been eligible for it in the past. Banks were more comfortable lending money, and there was more money to lend. Fannie Mae's important work in this area continues to the present day.
What is the Secondary Mortgage Market?
The secondary mortgage market is all about what happens to your loan once it's been approved by your lender.
Along with Freddie Mac, Fannie Mae is an institution backed by the federal government that purchases mortgage loans and either holds onto them or repackages them. When these purchased mortgages are put together in a group, they are known as mortgage-backed securities. Hedge funds, pension funds, and insurance companies buy these MBS and make money off of the interest payments.
In purchasing these loans from lenders, Fannie Mae created more liquidity, which means in turn that those lenders can go on extending loans to additional home buyers. The actions of Fannie Mae and Freddie Mac also help ensure that interest rates stay lower than they would otherwise be.
Guidelines for Lenders
Another way that Fannie Mae is helpful to people who want to buy a home is by requiring certain guidelines for lenders. Fannie Mae guidelines include a requirement that the lender be compliant with the federal government's Statement on Subprime Lending. This means the lenders have to avoid subprime loans with certain characteristics that make them riskier. In addition, Fannie Mae will only buy and guarantee loans that are under certain limits, which are set by the Federal Housing Finance Agency. Those limits are higher for areas where housing costs tend to be particularly high.
All of this adds up to a healthier housing market in general, increased consumer protection for borrowers, and greater protection for lenders.
There is a Fannie Mae selling guide that includes much more detail for lenders about requirements for working with the entity.
Fannie Mae vs Freddie Mac
How do Fannie Mae and Freddie Mac differ? It's true that both enterprises are similar in many ways. Freddie Mac was created more than three decades after Fannie Mae, in 1970, and its purpose was to expand the secondary mortgage market and provide some competition for Fannie Mae.
The main difference in the two is the types of lenders that they work with. Fannie Mae works with large commercial banks. Freddie Mac buys loans from smaller local banks.
There are a few other differences as well, such as in their lending requirements and the criteria of the loan programs that they participate in.
Fannie Mae and Freddie Mac both back loans in different programs for people who may not have enough for a down payment on a home. For Fannie Mae, this is the Home Ready loan, and it is offered to people who make 80% of the median income for their area or less. For Freddie Mac, it is the Home Possible Loan. This one requires that the applicant makes no more than the average income for the area.
In an Austin real estate market or a similar market where housing prices can be high, these types of loans can be helpful for individuals who might otherwise be shut out of the market entirely.
Can You Buy Fannie Mae Stock?
The 2008 financial crisis and other issues have affected Fannie Mae and the value of Fannie Mae stock, and you can't purchase it on an open exchange. Fannie Mae and Freddie Mac are both in conservatorship under the Federal Housing Finance Agency, and Fannie Mae stock can only be purchased over the counter. Buying and selling on the OTC market can be complicated and must be done through a broker-dealer.
However, if you are hoping to buy or sell a home in the ATX area or elsewhere in the country, you don't have to worry about performance on the markets. As a buyer or a seller of a home, you'll still benefit from the liquidity and flexibility of lenders that is made possible in part by Fannie Mae.
Over nearly 100 years of existence, Fannie Mae has adapted to better help homeowners and people who want to buy a home. Like Freddie Mac, Fannie Mae offers a number of useful resources, such as help with recovery after a hurricane or another natural disaster, a mortgage calculator, a tool for loan lookups and more. An app can help you better access some of these resources on the go.
Throughout the many changes it has undergone over the decades, Fannie Mae continues to play an important role in the housing market and in ensuring that loans remain available for a large population of potential buyers.
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