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In order for Fannie and Freddie to be able to provide such a guarantee, they require originating banks the banks that originally lend the money directly to the borrower to make sure they check the creditworthiness of the borrower.
Originating banks have to follow certain rules and guidelines e. These rules and guidelines are meant to reduce the likelihood of a default on the loan. When all parts of the whole are functioning as they should, more people are able to afford to buy a home, debts are repaid, and investors make money. Fannie Mae and Freddie Mac directly affect conventional lending for home buying.
When dealing with conventional loans , there are two main kinds: conforming and non-conforming. Conforming loans are also sometimes called "qualified mortgages," or QM. Conforming loans are those which adhere to Fannie and Freddie's guidelines. That is, conforming conventional loans only go to those borrowers who are most likely to pay back their loans — i.
A non-conforming loan is a loan that a bank makes that does not adhere to Fannie and Freddie's guidelines. The loan is either made to less creditworthy borrowers or for a larger amount than Fannie and Freddie recommend see jumbo mortgage. Non-conforming loans are usually higher interest loans to make up for the amount of risk inherently involved in the investment of them; non-conforming loans are common when it comes to buying a condo.
As recently as December , a number of large U. Unlike Fannie and Freddie, Ginnie is wholly owned by the U. In contrast, the securities bought from Fannie and Freddie are implicitly — i.
Historically, investing in Ginnie Mae's bonds is safer than investing in those bought from Fannie Mae and Freddie Mac. The stimulus bill "bailed out" Fannie and Freddie. The FMCC also focused on loans serviced by smaller banks and lenders, which allowed it to serve a different set of clientele with similar often lower-income needs.
Additionally, whereas Freddie Mac more swiftly kicks mortgages to the secondary market, FNMA retains some loans purchased with agency funds. Instead, they work with lenders — Fannie Mae with larger institutions, Freddie Mac with smaller — to establish lending guidelines. They then purchase loans that meet these guidelines from the primary mortgage market, injecting banks with the capital needed to issue more loans.
This process also keeps loan costs and interest rates low. Once Freddie Mac and Fannie Mae have their loans in hand, they bundle mortgage loans into mortgage-backed securities, or MBSs, to sell to investors on the secondary mortgage market. These securities often go to institutional investors, insurance companies, and some retirement funds. Fannie and Freddie use the proceeds from MBS sales to purchase additional loans, and the circle continues.
As federally backed, publicly traded institutions, Fannie Mae and Freddie Mac have obligations to homeowners, investors, and the housing market. This mission to provide affordability, profits, and stability means that they share several similarities. Additionally, they drive the secondary mortgage market by packaging and reselling bundles of mortgages as MBSs to investors.
They do this by setting the guidelines that all conforming loans must adhere to, including setting term lengths, loan sizes, credit and debt limits, and proof of income requirements. Unfortunately, for many, Freddie Mac and Fannie Mae are also synonymous with the housing crisis.
As a result, the U. Though the money has since been repaid, they remain under government conservatorship, with the Treasury owning the bulk of their senior preferred stock.
It sold these derivatives to hedge funds, pension funds, and individual investors. In , Congress transformed Fannie Mae into a company. Congress wanted to stop funding it as an agency. It needed the money to finance the Vietnam War. Instead of using tax dollars to fund it, the government allowed Fannie to sell stocks to shareholders in an initial public offering. That allowed stockholders to own it. But it was also a Government-Sponsored Enterprise. The U. That turned out to be quite a dangerous arrangement.
In , Congress established Freddie Mac. It freed up bank funds so they could make more mortgages. It also focused on buying year mortgages from banks. It also sold its mortgages to the secondary market. Fannie held onto its mortgages. But they functioned as government-sponsored entities. This meant they had to be profitable for the shareholders while creating the secondary market that made the resale of mortgages feasible.
Together, Fannie and Freddie saved the U. This was more than double their share of the mortgage market prior to the crisis. Private mortgage financing had simply dried up. After the recession , most banks would not give anyone a loan without Fannie Mae and Freddie Mac guarantees. Treasury Department owns all their senior preferred stock. All of their profits go to the U.
Investors can still buy common stock and junior preferred stock. The conservatorship doesn't allow them to pay dividends. Fannie and Freddie buy their mortgages from different sources.
Fannie buys them from large commercial banks. Freddie buys them from smaller banks. They also offer different programs for those who can only make low down payments. Fannie Mae offers the Home Ready loan.
Freddie offers the Home Possible program. Fannie and Freddie's origins and original purposes were also different.
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