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What Is The Role of Fannie MAE and Freddie MAC?
The Role of Fannie Mae and Freddie Mac on Conventional Loans. As mentioned earlier, the role of Fannie Mae and Freddie Mac is to keep liquidity and stability in the housing and mortgage markets.
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Fannie Mae and Freddie Mac are the two mortgage giants in the nation in charge of buying mortgages on the secondary market. Without Fannie Mae and Freddie Mac, mortgage lenders would not be able to offer mortgage loans with low down payment at low rates.
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Without Fannie Mae and Freddie Mac, housing prices would not be at a stabilized value like it has been for decades. Fannie Mae and Freddie Mac are part of the federal government, nor is it backed by government agencies like FHA, VA, and USDA loans. The two mortgage giants are government-sponsored enterprises (GSEs), the two largest purchasers of mortgage-backed securities. Fannie Mae and Freddie Mac will purchase mortgage loans from private lenders to keep liquidity in the mortgage markets.
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Without Fannie and Freddie, lenders would not be able to originate and fund mortgage loans with a low down payment at competitive rates and favorable terms. The housing market would not be as stable as it has been in the past 50 years without Fannie Mae and Freddie Mac. In the following paragraphs, we will cover conventional loans and how the conforming mortgage loan process works.
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The role of Fannie Mae and Freddie Mac is to keep liquidity in the housing market. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) play crucial roles in the U.S. housing finance system. Both are government-sponsored enterprises (GSEs) created to enhance the flow of credit to the housing market, making homeownership more accessible and affordable for Americans. Here’s a detailed look at their roles:
Roles of Fannie Mae and Freddie Mac
Secondary Mortgage Market
- Fannie Mae and Freddie Mac operate primarily in the secondary mortgage market. They do not originate or service loans directly to borrowers. Instead, they buy mortgages from lenders, such as banks and mortgage companies, providing these institutions with liquidity to issue more loans.
Mortgage Securitization
- Purchasing Mortgages: Fannie Mae and Freddie Mac buy mortgages that meet their underwriting standards from primary lenders.
- Pooling and Securitizing: These mortgages are pooled together to create mortgage-backed securities (MBS), which are then sold to investors on the open market.
- Guaranteeing MBS: They guarantee the timely payment of principal and interest on the MBS, which provides additional security to investors.
Standardization and Stability
- Underwriting Standards: They set standardized underwriting guidelines for the mortgages they purchase. This helps ensure consistency and quality across the mortgage market.
- Market Stability: By providing a steady flow of capital to the mortgage market, Fannie Mae and Freddie Mac help stabilize the housing finance system, even during economic downturns.
Affordable Housing Goals
- Both GSEs are tasked with promoting affordable housing. They must focus on low—and moderate-income households, helping to ensure that a wider range of people have access to homeownership. They support affordable housing programs and initiatives, assisting first-time homebuyers and underserved communities.
Differences Between Fannie Mae and Freddie Mac
Historical Background:
- Fannie Mae: Established in 1938 during the Great Depression as part of the New Deal to expand the flow of mortgage money by creating a secondary market.
- Freddie Mac: Created in 1970 to compete with Fannie Mae and further enhance the liquidity and stability of the mortgage market.
Business Models:
- Fannie Mae: Typically buys mortgages from larger commercial banks.
- Freddie Mac: Usually purchases mortgages from smaller banks and thrift institutions.
Impact on Borrowers
Access to Credit: By buying mortgages and providing liquidity to lenders, Fannie Mae and Freddie Mac ensure a consistent supply of mortgage credit available to borrowers.
Lower Interest Rates: Their involvement helps keep mortgage interest rates lower than they might otherwise be by increasing the supply of funds available for mortgage lending.
Standardized Loan Products: Fannie Mae and Freddie Mac promote uniform underwriting standards and loan products, making it easier for borrowers to understand their mortgage options.
Regulatory Oversight
Federal Housing Finance Agency (FHFA): The FHFA regulates Fannie Mae and Freddie Mac and oversees their operations to ensure they fulfill their public mission and operate safely and soundly.
Conservatorship: Since 2008, both GSEs have been under the conservatorship of the FHFA following the financial crisis. This means they are operated with oversight to stabilize their financial health and support the housing market. Fannie Mae and Freddie Mac are essential in ensuring the stability, affordability, and accessibility of the U.S. mortgage market. By purchasing mortgages from lenders and converting them into securities, they provide liquidity, promote standardized lending practices, and support affordable housing goals, ultimately benefiting both lenders and borrowers.
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What is a Conventional Mortgage
To qualify for a conventional mortgage, the borrower needs a minimum of a 620 FICO, and the debt-to-income ratios cannot exceed 50% DTI.
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Fannie Mae and Freddie Mac are the two mortgage giants that purchases most of the mortgage loans that get funded by mortgage lenders. Mortgage companies use their warehouse line of credit to fund home loans and once funded, lenders sell the funded loans on the secondary market. Lenders can sell it to a larger lender where they package up the loans as mortgage-backed securities and the end buyer is often Fannie Mae or Freddie Mac.