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Why you need Fannie and Freddie

By Polyana da Costa ·
Thursday, June 13, 2013
Posted: 4 pm ET

Mortgage giants Fannie Mae and Freddie Mac backed four in every five mortgage loans originated last year, according a report by the Federal Housing Finance Agency, or FHFA.

The entities, which are overseen by the FHFA, are not direct lenders. They buy or guarantee loans that meet their standards after the loan is issued to the borrower. Without them, most borrowers seeking a conventional loan would not be able to get a mortgage these days.

Together, Fannie and Freddie guaranteed $1.7 trillion in new mortgages in 2012, or 77 percent of all mortgages originated during that period, the report says.

But don't feel like you need to thank Fannie or Freddie for backing your loan. The two entities have borrowed a total of $187.5 billion from the Treasury Department to stay afloat since they were taken into conservatorship five years ago.

They turned profitable again last year but are still struggling with a large volume of past due loans.

Bad loans

The serious delinquency rate on Fannie Mae's residential loans -- which had remained well below 1 percent for two decades up until the 2008 financial crisis -- was 3.29 percent in 2012. That's still high, but it's a significant improvement from the peak in 2009 when 5.38 percent of Fannie's single family home loans were seriously delinquent, or more than 90-days past due.

Your credit score

As delinquency and foreclosure rates decline, lending standards might loosen up a bit. But potential borrowers should continue to think of their credit as their most valuable tool to get the best rate on a mortgage. The average FICO score on new loans guaranteed by Fannie and Freddie in 2012 was in the mid-700s.

Does that mean you can't get a loan if your score is lower than that? No. FHA loans can be an alternative for borrowers with lower scores. Still, many FHA lenders prefer borrowers who have a FICO score of at least 620, and the mortgage insurance on FHA loans is usually more expensive than conventional loans.

Have you had trouble qualifying for a mortgage? Please share your story with us.

Follow me on Twitter @Polyanad.


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