You’ve probably heard of Fannie Mae quite a bit over the years without fully understanding it. Fannie Mae plays a big role in real estate and buying homes, so it’s worth getting some background information to help you better understand the mortgage process.
The Federal National Mortgage Association is Fannie Mae. This government-sponsored enterprise, or GSE, was founded during the Great Depression by Congress as part of the New Deal. The goal of creating Fannie Mae was to stimulate the housing market by increasing mortgage availability to borrowers with low-to-moderate income.
Fannie May is not a provider or originator of mortgages directly to borrowers. Instead, it buys and guarantees mortgages through the secondary mortgage market.
Along with Freddie Mac, Fannie Mae is the biggest mortgage buyer on the secondary market.
At the start of the 1900s, it was difficult to get a mortgage, with most people being unable to obtain a down payment. The loans were frequently short-term, in contrast with the long-term amortization periods that loans have currently. Often when loans came due, they required large balloon payments. Then, if a homeowner couldn’t make the payment or refinance their loan, they would face foreclosure.
During the Great Depression, foreclosure rates went up sharply, so the Congress of the U.S. responded with the creation of Fannie Mae. The objective was to create a funding stream for housing that would be available to everyone. The result was financing long-term fixed-rate mortgages, with the ability to refinance a loan at any time throughout the loan’s life.
Since Fannie Mae invests in the mortgage market, it delivers more liquidity to lenders so they can then underwrite more mortgages.
When Fannie Mae buys and guarantees a mortgage, there have to be strict lending criteria that are met. There are certain loan limits, and lenders are required to comply with the Statement on Subprime Lending to work with Fannie Mae. The federal government issued the statement, addressing risks that come with subprime loans, including low introductory rates followed by higher variable rates.
In 2020, Fannie Mae acquired $1.4 million in single-family and multifamily loans, representing the largest amount of liquidity in the mortgage market ever in the history of Fannie Mae.
Once Fannie Mae buys mortgages from the secondary market, they’re pooled to create mortgage-backed securities or MBS. Assets secured by mortgages back MBS. Then, institutions like insurance companies purchase the mortgage-backed securities that Fannie Mae creates. Fannie Mae guarantees payment on principal and interest for its mortgage-backed securities.
Fannie Mae also has a retained portfolio, investing in its own MBS and those from other institutions.
In 2008, the government took over Fannie Mae and Freddie Mac. The U.S. government stepped in with a promise of bailing out bad loans to stop some of the hemorrhaging from the housing market.
Now, Fannie Mae has different credit options for homeowners to help people who would otherwise have difficulty getting financing.
For example, there’s the HomeReady Mortgage which is a product that lets homeowners buy a property with a low down payment. To qualify for a HomeReady Mortgage, borrowers should have a low to moderate income and a credit score below 620. If your score is above 620, you may qualify for better pricing. Another program is the 3% Down Payment option which helps homeowners who wouldn’t otherwise have access to enough cash for a larger down payment.
The RefiNow program is available from Fannie Mae for low-income mortgage holders. The program requires that a homeowner’s interest rate is reduced by a minimum of 50 basis points, with a monthly savings of at least $50 on mortgage payments. Homeowners must earn at or below 80% of their area median income.
Fannie Mae has a long history in America, and it’s regained its footing even following the 2008 housing crisis. Today Fannie Mae is the largest backer of 30-year fixed-rate mortgages, and it’s a key player in promoting more homeownership.