Fannie Mae: Loans, HomePath & All You Should Know
Fannie Mae (officially the Federal National Mortgage Association, or FNMA) is a government-sponsored enterprise (GSE) – that is, a publicly traded company which operates under Congressional charter – that serves to stimulate homeownership and expand the liquidity of mortgage money by creating a secondary market. Established in 1938 during the Great Depression as part of the New Deal, Fannie Mae channels its efforts into increasing the availability and affordability of homeownership for low-, moderate- and middle-income Americans.
As a secondary mortgage market participant, Fannie Mae does not originate loans or provide mortgages to borrowers. Instead, it keeps funds flowing to mortgage lenders (e.g., credit unions, local and national banks, thrifts and other financial institutions) through the purchase and guaranty of mortgages made by these firms. In fact, it's one of two of the largest purchasers of mortgages on the secondary market: The other is its sibling, the Federal Home Loan Mortgage Corporation, or Freddie Mac, which is also a government-sponsored enterprise created by Congress.
By investing in the mortgage market, Fannie Mae creates more liquidity for lenders, such as banks, thrifts and credit unions, which in turn allows them to underwrite or fund more mortgages. The entity estimates it has funded the market with $5 trillion since 2009, financing approximately six million home purchases, 14 million refinancings, and three million rental apartments. It is the largest funder or backer of 30-year fixed-rate mortgages in the U.S.
Fannie Mae Stock
Fannie Mae has been publicly traded since 1968. Until 2010, it traded on the New York Stock Exchange. It was delisted following the mortgage, housing and financial crisis after its stock plummeted below the minimum capital requirements mandated by the NYSE. It now trades over-the-counter.
In the latter half of 2008, Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Committee. Both were bailed out to the tune of $187.4 billion, which saved them from collapse. By 2014, Fannie Mae had repaid the government more than the sum it received. (For related reading, see: Analyzing the Fannie Mae and Freddie Mac Fallout.)
In August of 2012, the terms governing the Fannie Mae's dividend obligations changed so that the U.S. Treasury claims any profits at the end of each quarter, and provides capital if there is a deficit. So even though Fannie Mae makes money, its profits are handed over each quarter to the government.
Fannie Mae Guidelines
In order for a mortgage lender to be eligible to be backed by Fannie Mae it must agree to not practice unethical subprime lending practices. Subprime loans, which have higher rates than prime rate loans, are offered to borrowers with poor credit who are considered a higher risk by the lender.
The mortgages Fannie Mae purchases and guarantees must meet strict criteria. For example, the limit for a conventional loan for a single family home in 2017 is $424,000 for most areas, and $636,150 for high-cost areas including Hawaii and Alaska.The Federal Housing Finance Agency (FHFA) sets these limits (to see them for all areas, click here.)
After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities (MBS). MBS are asset-backed securities that are secured by a mortgage or pool of mortgages. Fannie Mae’s mortgage-backed securities are then purchased by institutions, such as insurance companies, pension funds and investment banks. It guarantees payments of principal and interest on its MBS.
Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio, which invests in its own and other institutions' mortgage-backed securities. Fannie Mae issues debt, called agency debt, to fund its retained portfolio. (For related reading, see: Fannie Mae, Freddie Mac and the Credit Crisis of 2008.)
Fannie Mae Loans
In order to obtain a loan that is backed by Fannie Mae, you’ll have to go through an approved lender. Along with the avoidance of subprime loans, mentioned above, lenders must meet eligibility and underwriting criteria that ensures the credit quality of the financing.
Mortgages purchased and guaranteed by Fannie Mae are called conforming loans. Generally speaking, conforming loans have lower interest rates than non-conforming or jumbo loans, which are typically not backed by Fannie Mae because they exceed its loan size limits.
How to Apply for a Fannie Mae-Backed Mortgage
When you have found a lender who is eligible to issue a Fannie Mae-backed loan, you will be guided in filling out a Uniform Residential Loan Application. You will need to gather and provide financial information and documentation. This includes a record of employment and your gross income and statements to back these up, such as a W-2 Form or Form 1099. You will also have to provide a total of your monthly debt obligations, such as balances on credit cards, car payments, alimony and child support.
In order to be approved for a Fannie Mae-backed loan, having a front-end debt-to-income ratio (DTI) of no more than 28% is preferable. A front-end DTI determines how much of your gross income goes towards housing costs. If your DTI is too high, if you can, make a larger down payment, which will reduce your monthly costs. Fannie Mae requires a minimum down payment of 5% for a fixed-rate mortgage, although 20% is typically ideal.
Homebuyers must also meet minimum credit requirements in order to be eligible for Fannie Mae-backed mortgages. For a single-family home that is a primary residence, a FICO score of at least 620 for fixed-rate loans and 640 for adjustable-rate mortgages (ARMs) is required. Of course, the better — or higher — your FICO score, the more eligible you are for the lowest available interest rates.
Following the mortgage meltdown, Fannie Mae began to focus on loan modifications. Loan modifications change the conditions of an existing mortgage to help borrowers avoid defaulting, ending up in foreclosure and ultimately losing their home. Modifications can include a lower interest rate and extending the term of the loan, which would lower monthly payments. Fannie Mae has completed more than 1.5 million loan modifications since 2009. (For related reading, see: Winners of the Fannie/Freddie Bailout.)
Fannie Mae HomePath
When foreclosures arise on mortgages in which Fannie Mae is the owner/investor, or when properties are acquired through deeds-in-lieu of foreclosure or forfeiture, Fannie Mae attempts to sell the properties in a timely manner in order to minimize potential impacts on the community. HomePath.com is the Fannie Mae website where homebuyers and investors can search for and make offers these properties, and HomePath Mortgage offers buyer financing products for the properties. In some cases, special financing may be available through HomePath Mortgage and HomePath Renovation Mortgage. These include expanded seller contributions for owner-occupied properties, and lower down payment options for buyers with multiple financed properties.
HomePath.com exclusively offers properties that are owned by Fannie Mae, and include single-family homes, town houses and condominiums. Fannie Mae uses local real estate professionals to prepare, maintain and list the properties for sale. Most listings have photographs, property descriptions and other details, including school and neighborhood information. The number, type and sales prices vary greatly by market, as does the condition of the properties. While some homes are move-in ready, others require repairs or even extensive renovations. Each property is sold in "as is" condition.