Explained: Fannie Mae, Freddie Mac and the mortgage industry
What You’ll Learn
What are Fannie Mae and Freddie Mac
How they interact with the mortgage world and homebuying process
Why they matter to you
Fannie Mae and Freddie Mac keep the mortgage industry stable because they have the government on their side
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Mortgage Corporation) are characterized as Government Sponsored Entities (GSEs). These privately owned companies come with an implied guarantee that the US government won’t let them default on their debt obligations. This stability has helped Fannie Mae and Freddie Mac become the largest sources of housing finance in the United States.
They keep the mortgage industry moving by buying and selling debt
These companies don’t interact with homeowners directly, but they’re important to the lending process. Mortgages are expensive, even for banks, which means banks have a hard time issuing them in high numbers. So Fannie Mae and Freddie Mac buy mortgages from your bank and allow them to lend to more potential homebuyers. These mortgages have to follow certain rules set by Fannie Mae and Freddie Mac to make sure that there’s no unnecessary risk. Once assessed, Fannie Mae and Freddie Mac take handfuls of these mortgages, and turn them into mortgage backed securities (MBSs).
MBSs are agreements that exchange a lump sum of money for the right to collect valuable loan payments. Fannie Mae and Freddie take the lump sum payment from investment banks, hedge funds, pension managers, and other investors, then give them debt collection rights in return.
Here’s an example of how this might work in the real world:
A homebuyer comes to Better Mortgage, looking for a mortgage for their dream home and we successfully fund their loan. Since Better follows Fannie Mae guidelines, that loan gets sold to Fannie Mae. Once Fannie Mae purchases the loan, they pool it with other similar loans and sell it to a bank that manages the pension for a teachers union. So the debt that helped a borrower buy a home is now being used to help fund someone’s retirement.
Simply put, Fannie Mae and Freddie Mac make sure more people can own homes
Fannie Mae and Freddie Mac help banks issue more home loans, which lowers the price of the average mortgage, and allows more people to become homeowners. Without them, owning a home wouldn’t be as common and easy as it is today.
By conforming to Fannie Mae’s lending guidelines, Better Mortgage helps make sure both the lender and the homebuyer are in a relationship that’s safe and beneficial for everyone involved. We covered a lot about a pretty complicated topic, but if you have any questions about the mortgage industry, reach out to one of our Mortgage Experts. They’ll be happy to fill you in.