What is Fannie Mae?

Written by on January 10, 2012 in Government Mortgage Loans - No comments
How Fannie Mae Participates in the Real Estate & Mortgage Market

The Federal National Mortgage Association, better known by its nickname Fannie Mae, is a government-sponsored enterprise (GSE). When the real estate market crashed heavily in the Great Depression, the Roosevelt Administration wanted to step in. Many homeowners lost everything when the severe deflation left them stranded in negative equity: they owed more than the houses were worth at current prices. The Roosevelt Administration created the agency to rectify this unfortunate turn of events.

Over the years, Fannie Mae has come to play a much larger role in the housing market. The GSE purchases mortgage loans from banks that meet certain standards. Once the mortgage loans are off of the banks’ books, they can make more loans to homeowners that need them. Fannie Mae mortgages must meet lending requirements set by the regulators the GSE employs. During the housing bubble from 2003 to 2007, these lending standards were relaxed compared to the stringent guidelines we see in today’s mortgage market.

That idea quickly evaporated in the crash of 2008. Today the lending standards of the past have been largely restored. The GSE, along with its counterpart, the Federal Home Loan Mortgage Corporation or Freddie Mac, controls the secondary mortgage market. These two agencies bundle their loans together into mortgage-backed securities, which are sold to investors on Wall Street and around the world.

Mortgage-backed securities make mortgage rates sensitive to events in the government bond market. The Federal Reserve can also influence the real estate market directly through purchasing mortgage-backed securities. Homeowners are thus dealing with a variety of factors when they decide to apply for a home loan.

Homeowners can discover if their loan has been purchased by either of the GSEs. Their experience depends on whether they have a fixed-rate mortgage (FRM) or adjustable-rate mortgage (ARM). ARMs can be a bit more risky because new developments in the secondary mortgage market may result in interest rates rising unexpectedly. This puts pressure on homeowners with an ARM to either refinance, convert an ARM into an FRM or sell their house.

One of the restrictions on Fannie Mae loans is called the conforming limit. This is the highest mortgage price the GSE will purchase for any particular mortgage. The conforming limit varies from market to market based on zip code but it is typically $417,000. Mortgage loans higher than the conforming limit are known as jumbo loans. These are not purchased by the GSEs. Consequently, the interest rate on these loans tends to be slightly higher.

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