Fannie Mae, a quasi-government agency, makes home buying and renting more affordable while reducing risks for lenders. It is crucial in maintaining the 30-year mortgage with a fixed rate, which is the most popular option for home loans.
What is Fannie Mae, and how does it work? Fannie Mae, its workings, and the impact on investors and homeowners are explained.
Fannie Mae: Definition and examples
Fannie Mae stands for Federal National Mortgage Association (FNMA). Fannie Mae, a government-sponsored enterprise founded in 1938 and a privately owned agency created by Congress to improve the credit flow in certain parts of the U.S. economic system, is essentially a GSE. GSEs provide financial services for the public, including mortgages. They do this by maintaining capital markets liquidity.
Fannie Mae currently falls under the Federal Housing Finance Agency’s (FHFA) conservatorship. The Treasury Department supports Fannie Mae financially through the purchase of senior preferred stocks and GSEs can retain their earnings in order to comply with capitalization rules.
Fannie Mae is primarily responsible for purchasing mortgages from credit unions, banks, mortgage brokers and mortgage lenders. The money that lenders save by making these purchases can be used to make more loans. FNMA packages some of its mortgages into Mortgage-Backed Securities.
Fannie Mae provides funding for the conutruction of rental housing that is affordable. Fannie Mae must provide a certain percentage of its mortgages to low- and middle-income families.
Fannie Mae will provide $1.4 trillion in funding for the housing market by 2020. It was responsible for 6 million U.S. houses, including those purchased, refinanced, or rented. 2
Fannie Mae and Home Buyers
Fannie Mae guarantees loans from most banks and mortgage lenders. All lenders who offer FNMA-guaranteed loans must, however, be approved by Fannie Mae and adhere to its lending guidelines.
Note:
In 2021, the maximum Fannie Mae home loan for a single family house is $548.250 in 48 states, and $822.375 in Alaska. Hawaii, Guam and U.S. Virgin Islands.
You must have a credit score below 620 and a debt to income ratio (DTI), which is 36% or less (in some cases your DTI may be as high at 45%). Your lender will provide you with the Uniform Residential Loan Application.
Fannie Mae also offers a HomeReady Mortgage. This is useful if you do not have the money to make a large deposit, if you plan on including a co-borrower or if your income comes from non-traditional sources. HomeReady requires only a 3% deposit. You can also use co-borrowers, such as your parents, to increase your chances of qualifying. The mortgage requires that borrowers complete an online course on homeownership. 6
There are programs forbearance or loan modification that you can use if you have an existing Fannie Mae loan and run into financial difficulties. disaster help is also available to both homeowners and tenants.
Notable Events
Congress created Fannie Mae in 1938 as a secondary market for mortgages insured by the FHA. In 1968, Fannie Mae was listed on the New York Stock Exchange as a company owned by shareholders. It could now buy any mortgage.
Note:
Fannie Mae, a similar organisation that serves smaller banks, is sometimes called the Freddie Mac sister.
In the aftermath of the Great Recession and the subprime crisis it was difficult for Fannie Mae to guarantee an excess of bad mortgages. Congress authorized the Treasury in September 2008 to buy up to $200 billion of their preferred stock or mortgage-backed securities. Treasury paid $116 Billion for Fannie Mac in this Fannie Mac and Freddie Mac bailout. 8
The government nationalized the companies to keep them solvent. It was costly, costing taxpayers $187 billion in total. The Treasury started transferring profits to its general fund four years later. Through 2018, Fannie Mae had paid back $176 billion in dividends.10
Fannie Mae’s Impact
Fannie Mae has a major impact on the financial health of individuals and nations.
What it means for the U.S. economy
Fannie Mae played a major role in facilitating homeownership for low- and middle-income families before the financial crisis. Fannie Mae is often blamed, but it was actually the banks who repackaged mortgage-backed securities in bundles, which led to unethical business practices. Fannie Mae, which purchased and guaranteed mortgage loans after the crisis, kept the housing market alive by buying them.
What it Means to Home Buyers
Fannie Mae is helping Americans to become homeowners by increasing the number of opportunities. Fannie Mae does this by keeping the cost of mortgages low and increasing their availability. It increases the availability of affordable loans for low- and moderate-income families.
What it means for individual investors
Fannie Mae’s stock was traded on the NYSE until 2010. In July 2010, Fannie Mae’s preferred and common stocks began trading on the OTC Bulletin Board. Investors can still purchase common stock and junior preferential stock. However, dividends are not allowed under the conservatorship.
The Key Takeaways
- Fannie Mae makes homeownership more affordable.
- This increases the number of people eligible for mortgages.
- Fannie Mae makes mortgage lending less risky.
- The housing market was sustained during the Great Recession.
- Fannie Mae received a bailout during the housing crises, but it has now repaid these funds to the Treasury.
