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The Federal National Mortgage Association (FNMA), colloquially known as Fannie Mae, is a Congressionally-chartered agency that acts as a major player in the mortgage industry.
Fannie Mae does not originate or offer mortgages directly to borrowers, but instead purchases them from lenders who do, in effect guaranteeing a market for the mortgages. By investing in them this way, it offers liquidity, stability and an ongoing “flow of capital into the U.S. housing market,” as per the company’s website, as well as the banks and companies that make mortgage loans.
Along with buying loans from banks and mortgage companies, Fannie Mae offers a variety of loan products to financial institutions and education programs and services to consumers, helping to ensure homeownership for low- and middle-income Americans specifically.
What does Fannie Mae do?
Created during the Great Depression, Fannie Mae is structured as a shareholder-owned company, though it operates now under the control of the Federal Finance Housing Agency (FHFA). It is what is known as a government-sponsored enterprise (GSE): a private agency or corporation with a federal charter to provide financial services to the public.
In Fannie’s case, those financial services revolve around home loans. Fannie Mae performs a variety of functions to back the mortgage industry and, by extension, the housing market. It offers ready access to funds on reasonable terms to the thousands of banks, credit unions and mortgage companies that finance home purchases. With a commitment to “facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America,” Fannie also indirectly aids individuals.
Buys and backs mortgages
Fannie Mae buys home loans and mortgages in the secondary mortgage market (where lenders sell the loans and mortgages they’ve originated). This in turn frees up the lender’s capital so that it can extend new loans to more borrowers. Most mortgage originators do actually end up selling their loans, but since they often continue servicing them, the mortgage-holder never knows it.
In fact, Fannie Mae, and its sister GSE Freddie Mac (officially the Federal Home Loan Mortgage Corporation) are the largest mortgage market-makers in the U.S. In addition to purchasing mortgage loans on the secondary market, both Fannie and Freddie either hold the loans individually or package them into mortgage-backed securities to be sold to investors. Either way, the burden of the debit is acquired by Fannie and pressure is thus moved away from private lending institutions. Fannie Mae, like Freddie Mac, has a focus of keeping the mortgage market fluid and well-regulated, keeping credit and the flow of funds operating smoothly.
HomePath is a program Fannie Mae uses to help homeowners facing foreclosure. Through HomePath, Fannie Mae works with individuals, helping them to understand alternatives they may have. If a foreclosure does occur, HomePath properties are purchased back by Fannie Mae, making them a real-estate owned (REO) home. Prospective buyers may then purchase foreclosed and short-sale homes with a down-payment as low as 3 percent.
Some HomePath properties have been seized. Others, though, are owner surrenders – a property owner would rather walk away from their house than bear the brunt of a foreclosure on their credit. Either way, buyers must meet certain criteria to be eligible to purchase through this program. Buyers must be:
- Eligible to purchase the property on a contingency-free basis
- Willing and ready to close the sale quickly, often within 30 days
- Ready to purchase the property as-is, without repairs made before closing
- Represented by a real estate agent who uses a Fannie Mae-generated sales contract
- Pre-approved for a loan at the time of their offer (if the purchase is being made with financing)
In many cases, HomePath properties are sold as-is. In others, however, Fannie Mae may opt to invest in or repair the property, in the interest of maintaining neighborhood home values. Buyers with limited options may find this program advantageous, and real estate investors may find available properties using the program.
Runs counseling networks
Fannie Mae directly aids consumers by providing a variety of counseling services. They can be reached through its KnowYourOptions.org site. The site also provides consumer-friendly information about homeownership financials, including property rental versus purchase, forbearance and payment deferral options, mortgage modification programs and refinancing opportunities.
Mortgage Help Network
The Fannie Mae Mortgage Help Network is free for homeowners whose mortgages have been purchased by Fannie Mae and who have been impacted by a national disaster or other kind of crisis. Participants in this program can receive free HUD-approved nonprofit credit counseling to learn more about what their options are during times of financial hardship.
Disaster Response Network
A part of the larger Mortgage Help Network, this program helps to support homeowners whose property has been impacted by a natural disaster or other significant crisis, such as the COVID-19 pandemic. This support is available in multiple languages, and for up to 18 months in duration.
Asset Management Network
This program assists consumers much like the Disaster Response Network, but deals with other circumstances, such as delinquent payments due to an illness, job loss, or death.
Fannie Mae loan products
Like other government agencies, such as the Federal Home Administration (FHA), Fannie Mae operates through private lenders to offer financing options. The terms are more generous than those of conventional mortgage lenders, who typically require 10 or 20 percent of the property’s value as a down payment.
HomeReady is a loan program geared towards low-income aspiring homeowners — mainly first-timers, though experienced types can apply as well (as long as they don’t have an outstanding mortgage). While HomeReady, like the FHA, does not lend directly to consumers — it’s offered through Fannie-approved lenders — participation in the program can help borrowers who cannot qualify for conventional loans; in fact, it even has lower barriers than an FHA loan (as little as 3 percent down payment, vs FHA’s 3.5 percent). For first-time homeowners, requirements do include the completion of a homeowner education program before approval.
97% LTV Program
This program, aka “Conventional 97”, is available to first-time borrowers and consumers whose loans have already been purchased by Fannie Mae. Similar to HomeReady, buyers can pay as little as 3 percent down, creating a 97% loan-to-value (LTV) opportunity. These loans are available to those making somewhat more than HomeReady applicants.
REfiNow extends home refinances to borrowers who have substantial equity in their homes, and it is geared toward helping lower monthly housing costs. REfiNow requires borrowers to make at or less than 100 percent of the area median income, and allows for up to a 65% debt to income (DTI) ratio. As of April 2022, there is no longer a minimum credit score for borrowers to qualify for this program.
HFA Preferred is a low-down-payment conventional mortgage. Together with lenders, Fannie Mae works with Housing Finance Agencies (HSAs) to issue these loans. Similar to FHA loans, HFA loans are offered through Fannie Mae and Freddie Mac in partnership with state-level housing agencies; though they offer many of the same perks as FHA loans, they are not limited to first-time buyers.
History of Fannie Mae
Fannie Mae was established by the Congressional Fannie Mae (FNMA) Charter Act in 1938. In the wake of the Great Depression, nearly a quarter of U.S. homeowners lost their properties to foreclosure – and part of the government response was chartering Fannie Mae to help stabilize the housing market.
Prior to Fannie Mae, homeownership was within reach only for the privileged few: Mortgages were short-term and financed at best half of a home’s price. The establishment of this new agency brought forward a new type of loan product: the long-term (30-year), fixed-rate mortgage, which increased accessibility to homeownership for middle- and lower-income Americans. With more affordable monthly payments and lower down-payment thresholds, owning a home became part of the American Dream.
In 2008, Fannie Mae was placed under government conservatorship, along with Freddie Mac, as a part of that year’s Housing and Economic Act (HERA) legislation. The two companies had grown to a point of mortgage industry monopoly, and during the subprime mortgage crisis of 2006-7, their loan portfolios dropped drastically in value. To avoid their bankruptcy — and a collapse of the entire financial system — the U.S. government took control of both Fannie Mae and Freddie Mac.
Both companies remain under conservatorship in an effort to repair their balance sheets. As a part of this oversight, Fannie Mae is mandated to report its performance to the government, and is issued a scorecard each year ranking its financial health. The conservatorship is indefinite; according to one blog post from New York University’s Furman Center Blog, The Stoop, it is likely to end no earlier than 2026.
Frequently asked questions
Fannie Mae and Freddie Mac (also known as the FHLMC) are two separate entities. While both were established as government-sponsored enterprises (GSEs) and purchase mortgages, and both are under the conservatorship of the same government agency for now, Freddie Mac was created following an act of Congress in 1970, while Fannie is much older — dating from the Depression years.
Aside from being established separately, one major difference is that Fannie Mae tends to purchase loans from larger lenders, while Freddie Mac purchases mortgages from smaller companies. Together they own more than half of America’s conforming loans.
The nickname for Fannie Mae draws from the agency’s full name: the Federal National Mortgage Association. It’s a kind of verbalization of the acronym, FNMA.
No, Fannie Mae does not make loans directly to consumers. The agency purchases mortgages or other real estate loans from lenders. Fannie does offer some types of financing programs geared toward first-time or low-income borrowers, similar to FHA loans; but, as with those products, you actually obtain the financing through a particular lender.
An FMNA loan, aka a conforming loan or Fannie Mae-backed mortgage, is a loan or mortgage that has been sold to the Federal National Mortgage Association (FNMA, or Fannie Mae) — or one that meets the criteria for being sold to the agency. These include the loan being within a certain size, depending on the area; the borrower filling out a Uniform Residential Loan Application, and providing proof of income and assets; and the bank or mortgage company underwriting the loan being a Fannie Mae-approved lender.
The final word on Fannie Mae
Fannie Mae changed the mortgage and housing markets in the United States when it was established 90 years ago and continues to back a large portion of mortgage loans in the United States. Though the company does not loan directly to consumers, it does purchase loans and provide crucial liquidity to companies in the real estate lending industry.