By Kelsey TrumbullOct 17, 2017
If you have a mortgage or are going through the homebuying process, you’ve probably heard of Fannie Mae and Freddie Mac. While the names might be familiar, there’s much to learn about the two biggest players in the housing market. We believe it is important for you to understand their roles in the industry and how they function. Here’s a quick rundown of what they are and what they do.
Who They Are: The names Fannie Mae and Freddie Mac are actually creative acronyms for their respective organizations. Fannie Mae represents the Federal National Mortgage Association (FNMA), and Freddie Mac the Federal Home Loan Mortgage Corporation (FHLMC).
What They Do: Fannie Mae and Freddie Mac are government-sponsored enterprises, more commonly known as GSEs. Their main function is to assist lenders by providing liquidity, or access to funds. This is done primarily through the purchase of loans from lenders. Lenders provide borrowers with loans for a home purchase or refinance, but they want to be able to do so for as many borrowers as possible. Most loans have a lifespan of around 30 years, but lenders are unable to wait out the lifespan before getting their money back. If they did, they could only help a few borrowers before running out of money. However, GSEs like Fannie Mae and Freddie Mac can make the 30-year commitment. Buying the loans allows lenders to have their money returned right away and lets them engage in further lending to more borrowers.
Here is an example of how this process works: A lender has provided a borrower with a 30-year, $100,000 loan to purchase a home. The lender is now out $100,000 and will have to wait 30 years before being fully paid back. They only had $100,000 to give, so now they don’t have any money to help other borrowers. Instead of taking on the loan, the lender sells it to Fannie Mae or Freddie Mac. Now they can use that money to help another borrower.
Quick Note: You might be wondering what Fannie Mae and Freddie Mac do with the loans they purchase. The two GSEs buy thousands of loans every day, but they don’t need to keep them all. Rather than holding onto all the loans, Fannie Mae and Freddie Mac can sell them to different institutions, such as City Bank or Wells Fargo. Because there are so many loans, the institutions like to buy pools, or collections of loans that have all the same parameters.
How They Compare: While very similar in function, there are some differences between Fannie Mae and Freddie Mac. Fannie Mae was established first in 1938, followed by Freddie Mac later in 1970. They use different Automated Underwriting Systems (AUS): Fannie uses Desktop Underwriter (DU) and Freddie uses Loan Prospector (LP). The two also differ in how they handle student loans, condominium reviews, and self-employed borrowers. However, the two are more similar than different. Both GSEs have set guidelines that every loan must meet before they purchase it, involving aspects such as income, asset, down payment, and credit requirements. They both provide conventional lending, rather than government lending like their competitor, Ginnie Mae. While Fannie Mae used to only offer a Debt-to-Income (DTI) Ratio of 45%, they recently matched Freddie Mac at 50%. Both also have a maximum Loan-to-Value (LTV) Ratio of 97%.
Without Fannie Mae and Freddie Mac, many Americans would be unable to purchase a home. Both are vital to the housing market, making it important that you have a general idea of who they are and their function, especially if you are beginning the homebuying process.
If you are interested in learning more about Fannie Mae or Freddie Mac or have any questions regarding the home buying process, contact one of our licensed Mortgage Loan Originators.
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.