Definition
Fannie Mae, formally known as the Federal National Mortgage Association (FNMA), is a U.S. government-sponsored enterprise (GSE) established to enhance the flow of credit to specific sectors of the American economy, primarily housing. It does this by purchasing mortgages from lenders, packaging them and selling them as mortgage-backed securities to investors. The lenders then use these funds to provide more mortgages, thereby promoting home ownership and rental housing.
Key Takeaways
- Fannie Mae, officially the Federal National Mortgage Association, is a U.S. government-sponsored enterprise that operates in the secondary mortgage market. It purchases and securitizes mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.
- By packaging mortgages into mortgage-backed securities (MBS) and guaranteeing their timely payment of principal and interest, Fannie Mae attracts to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing.
- The activities of Fannie Mae are funded largely by the revenues that it earns from the MBS and other financial instruments it issues to the capital markets. By investing in the MBS, investors fund the mortgage loans that are either held in Fannie Mae’s portfolio or that back Fannie Mae MBS held by others.
Importance
Fannie Mae, the commonly used name for the Federal National Mortgage Association (FNMA), plays a critical role in the U.S. mortgage market.
As a government-sponsored enterprise, Fannie Mae buys mortgages from lenders, packages them into mortgage-backed securities (MBS), and sells them to investors, such as insurance companies, pension funds, and hedge funds. This process provides lenders with the liquidity to make more home loans, supporting the housing market.
Fannie Mae’s activities also help determine the prevailing interest rates that homeowners pay on their mortgages. So, understanding Fannie Mae’s role is essential for anyone interested in the dynamics of home financing and the broader financial market.
Explanation
Fannie Mae, officially known as the Federal National Mortgage Association (FNMA), serves a crucial role in the US mortgage financing segment. Established during the Great Depression era, its primary purpose is to stimulate the housing market by making mortgages more accessible for lower- to middle-income Americans.
It does this by purchasing majority of single-family or multi-family mortgages from banks and other loan genitors, consolidating these mortgages, and selling them to investors as mortgage-backed securities. This practice frees up capital for the banks to grant more loans, thus ensuring a stable and affordable supply of home financing.
In addition to its responsibility to sustain liquidity, stability, and affordability in the secondary housing market, Fannie Mae also provides tools and resources to help families in understanding their options for homeward ownership and rental housing. This in turn prevents housing bubbles from forming and reduces the risk of foreclosure, thereby fortifying the broader financial system.
The smooth operation of Fannie Mae is therefore essential in creating a sustainable enjoyment of home ownership for Americans. It helps maintain a balance in the US housing economy and plays a vital role in the overall economic health of the nation.
Examples of Fannie Mae
Home Purchasing: One of the most common real world examples of Fannie Mae is when a person purchases a home. When a homebuyer takes out a mortgage from a bank or a mortgage company, that lender might sell the mortgage to Fannie Mae. This allows the lender to remove the loan from their books and free up capital to lend to other borrowers. Fannie Mae then bundles these mortgages and sells them as mortgage-backed securities to investors, ensuring a fluid and accessible housing market.
Refinancing: Another real world example involves homeowners who want to refinance their mortgages. If their existing mortgage is a Fannie Mae loan, they could be eligible for its refinancing programs. These programs can help homeowners lower their interest rates, reduce their monthly payments, or change their mortgage term. The Home Affordable Refinance Program (HARP), which Fannie Mae participated in, is a good example of this.
Investing in Real Estate: Fannie Mae also operates the HomePath program which offers foreclosed properties owned by Fannie Mae to potential buyers. This provides an opportunity for investors or individuals to purchase real estate below market value. The First Look program within HomePath provides homebuyers who will live in the home themselves (as opposed to renting it out or selling it) the opportunity to bid on the homes before investors can, typically for the first 15-20 days the property is listed.
Frequently Asked Questions About Fannie Mae
What is Fannie Mae?
Fannie Mae, or the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) that buys mortgages from lenders, bundles them, and sells them as mortgage-backed securities to investors on the open market. This increases the supply of money available for mortgages and mortgage lending and expands the money available for new home purchases.
How does Fannie Mae work?
Fannie Mae does not originate loans or provide mortgages to borrowers. Instead, it purchases and guarantees mortgages through the secondary mortgage market. When a loan meets the standards set by Fannie Mae, it can purchase that loan from the lending institution, which then allows the institution to free up capital and make more loans. After purchasing the loans, Fannie Mae pools them together and sells them as mortgage-backed securities to investment banks, mutual funds, insurance companies, pension funds, and other financial institutions.
What is the role of Fannie Mae in the housing market?
Fannie Mae’s main function is to provide liquidity to the nation’s mortgage finance system. It’s goal is to help ensure a reliable and affordable supply of mortgage funds throughout the country. It does this by purchasing mortgages from banks and other lenders so they have funds to lend to more homebuyers.
What is the relationship between Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are both government-sponsored entities (GSEs), which means they are privately owned companies that are publicly supported. Both entities support the US housing market by buying mortgages from lenders, bundling them into mortgage-backed securities, and selling them to investors. This helps put more money into the housing market, making housing more affordable for more Americans.
What does a Fannie Mae backed mortgage mean for borrowers?
A Fannie Mae backed mortgage means a loan that meets the criteria for purchase by Fannie Mae. Such loans typically have lower interest rates than other types of loans because Fannie Mae’s guarantee lowers the risk for investors. Borrowers often get better terms, including lower interest rates and lower down payment requirements.
Related Entrepreneurship Terms
- Mortgage Backed Securities (MBS)
- Government-Sponsored Enterprise (GSE)
- Freddie Mac
- Federal Housing Finance Agency (FHFA)
- Conforming Loans
