Also, Fannie Mae offers the Home Ready Loan to borrowers who earn 80% or less of the area’s median income, while Freddie Mac offers the Home Possible Program that lends to borrowers who live in the home and do not earn more than the area’s average income. While Fannie Mae buys mortgages from large commercial lenders, Freddie Mac buys mortgage loans from smaller banks. The two entities differ in their target markets and in the products that they offer. For example, both entities purchase mortgages from the secondary market and sell them as mortgage-backed securities to investors. The two entities share similarities in their mode of operation. Freddie Macįannie Mae and Freddie Mac are government entities that were established to serve the US housing market, especially the low to middle-income earners. However, it only buys mortgages that meet its criteria to reduce the risk of default. It means that the agency commits to making principal and interest payments regardless of whether the mortgage borrowers make the scheduled payments or not. The investors are willing to pay a guaranty fee to the entity for taking on the lending risks. It then creates mortgage-backed securities from the underlying mortgages, which it sells to investors. The entity purchases mortgages from banks and credit unions as a way of writing off the debts from the books, and it assumes the lending risks associated with the mortgages. Fannie Mae then securitizes the whole loans and creates mortgage-backed securities, which it sells to investors at a profit.įannie Mae also receives guaranty fees as compensation for assuming lending risks from financial institutions. It borrows from financial markets by selling bonds and purchasing whole loans from mortgage originators. One of the ways that Fannie Mae uses to make money is to borrow money at low rates and reinvest it into whole borrowings and mortgage-backed securities. It sets a specific percentage of mortgages to cater to low to middle-income families. Fannie Mae guarantees that it will make monthly payments on the mortgage-backed securities, inclusive of the principal and interest. It also pays the investors a share of the monthly mortgage payments on a pro-rata basis. The agency packages similar types of loans into mortgage-backed securities and sells them to institutional and individual investors such as pension funds, endowment funds, hedge funds, and pension funds.Įven after selling the mortgage-backed securities to investors, Fannie Mae continues to own the underlying mortgages. For mortgage lenders to be eligible to sell their mortgages to Fannie Mae, they must meet strict criteria and agree not to practice unethical lending. Buying mortgages creates more liquidity for lenders, allowing them to underwrite more mortgages. How Fannie Mae Worksįannie Mae buys mortgages from mortgage brokers, banks and credit unions, which transfers the lending risks from the lending institutions to the entity. After delisting from the NYSE, Fannie Mae announced that it would trade its stock on the over-the-counter bulletin board. The government incurred a total debt of $197.4 billion in reviving the two entities. In late 2008, Fannie Mae and Freddie Mac were taken over by the government through a conservatorship of the Federal Housing Finance Committee (FHFC). The agency was delisted from the New York Stock Exchange after its stock dropped below the minimum capital required by the NYSE.ĭespite government attempts to revive the entity, it plunged into debts even more. Lenders engaged in unethical lending practices by lending to borrowers with poor credit history, which led to the housing bubble burst. In 1968, Fannie Mae transitioned from a government entity to a quasi-governmental corporation owned by shareholders, and this enabled the entity to buy any mortgage, including those listed on the New York Stock Exchange.ĭuring the 2008 financial crisis, the subprime mortgage crisis affected Fannie Mae’s ability to purchase new mortgages from the market. At that time, the body could only buy mortgages insured by the Federal Housing Administration. Its role was to grow the mortgage market by securitizing mortgages, thus allowing lenders to reinvest the assets into more lending and reduce reliance on local savings and loan associations. It does not provide mortgages to borrowers, but purchases and guarantees mortgages through the secondary mortgage market.įannie Mae was established in 1938 by the US Congress during the Great Depression as part of the New Deal instituted by President Franklin Roosevelt to manage the effects of the downturn on the economy. The Federal National Mortgage Association, typically known as Fannie Mae, is a United States government-sponsored entity that was established to expand the secondary mortgage market by making mortgages available to low and middle-income borrowers.
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