The name “Fannie Mae” tends to be thrown around regularly when discussing finance and real estate, but what does it stand for and what does it mean?
The Federal National Mortgage Association (FNMA) is a government-sponsored entity that is also referred to by its commonly known name “Fannie Mae.” This is a corporation backed by the Federal Government that specializes in the purchasing of mortgage loans in order to free up capital for lenders such as commercial banks.
Banks cannot continuously issue loans with the amount of capital they receive from monthly mortgage payments. Fannie Mae is not dependent on maintaining a balance of funds like a bank is, so it trades cash in the form of whole loans in exchange for the stream of income that mortgage payments generate over an extended period of time.
What is the secondary mortgage market?
When corporations like Fannie Mae purchase mortgages from lenders, this is creating a middle-man between banks and investors who purchase mortgage-backed securities. Fannie Mae does not issue mortgages, but it bundles mortgage loans it has purchased and sells them in the form of mortgage-backed securities.
Similar to bonds, mortgage-backed securities are debt instruments that provide a steady stream of income for lenders. The appeal of these securities is that Fannie Mae is assuming the risk of borrowers defaulting on their loans. Like other financial products, there are restrictions such as loan limits that lenders must meet to qualify for Fannie Mae.
The criteria that Fannie Mae sets for mortgage lenders help determine the creditworthiness of the borrower in order to mitigate the risk associated with lending large amounts of money. This, in turn, can make it harder for those with poor credit to purchase a home using a qualified loan. However, Fannie Mae also bans lenders from issuing subprime mortgages which is what led to the Great Recession in 2008.
How does this affect my mortgage?
Fannie Mae helps reduce mortgage rates by creating liquidity for mortgage lenders. This makes loaning money less expensive for banks and other lenders. Fannie Mae’s involvement also allows homeowners to have much smaller down payments and long-term loans such as the 30-year fixed rate mortgage. Before Fannie Mae was created in 1938 in response to the Great Depression, mortgages tended to last for 5-10 years with large down payments and balloon payments at the end of the loan term. For modern homeowners, this would be an unappealing and possibly inaccessible way to purchase a home.
Though financing and real estate can get confusing, everyone at The Peters Company is always happy to help our clients understand and learn more about the housing market and home loans!
– Written by Elizabeth Gill