Freddie and Fannie and the Mysteries of the Loan Universe
Ever get confused with all the bewildering terminology bandied about regarding home loans? Muddled with the mysteries of where loans go after you scratch out those 73 signatures at closing? Who are all these Mae people anyway? You know, Fannie Mae and her cousins Ellie Mae, Sallie Mae and Freddie Mac. Reminds me of a Clampett reunion, minus Jethro.
For this clarification of the mortgage industry we’ll just deal with Fannie and Freddie. These two are “The Agencies” – as in those who make the rules regarding what qualifies a borrower as acceptable to receive the Agency’s money in the form of a mortgage loan.
To simplify, the loan universe is divided between loans that are insured by the US government (FHA and VA) and those that are not. Those that are not insured are called conventional loans. Within this group of non-insured loans there is another division. Those loans that conform to the Agency guidelines are called conforming loans. The ones that don’t conform are called non-conforming.
A conforming loan in the U.S. is a type of mortgage loan that conforms to the very specific lending guidelines established by our friendly Agencies.
• Federal National Mortgage Association (Fannie Mae), which works with banks and mortgage lenders.
• Federal Home Loan Mortgage Corporation (Freddie Mac), which works with savings and loan institutions and credit unions.
• SLM Corporation (Sallie Mae; originally the Student Loan Marketing Association) is a publicly traded U.S. corporation, whose operations are originating, servicing, and collecting on student loans.
• Ellie Mae, Inc. was set up in 1997 and provides end-to-end business automation software for the mortgage industry.
Conforming loans are subject to strict guidelines regarding the borrower’s debt-to-income (DTI) ratio. Underwriters are required by law to meet proper documentation and underwriting standards when determining an applicant’s ability to repay. That includes a thorough examination of the applicant’s:
• Work history
• Credit rating and history
• Total debt
• Down payment
• Stocks, bonds, savings, retirement investments, and other assets
• Residence history for the previous two years
Conforming loan programs limit lending maximums. Currently, the conforming loan limit per single-unit home across the U.S. tops out at $417,000. In areas of the country with higher home costs and have “cement ponds,” super-conforming loans are available in expensive counties. Conforming loan limits can be adjusted from one year to the next.
These Agencies are government-sponsored enterprises. This means that although the government does not directly insure their loans it is implied that the government will not let them fail. Investors are aware of this favored status.
As a result, Fannie Mae and Freddie Mac can borrow money at a lower cost and in larger sums than would otherwise be available, which reduces the cost of mortgage credit. The money is raised through the sale of Agency bonds in the Bond Market … sister to the Stock Market. This is the money that is used to purchase the loans that you originally signed for with your originating Bank or Mortgage Broker. Ultimately the savings created by the Agency’s ability to borrow in bulk is passed on to qualified borrowers through lower interest rates.
Fannie Mae and Freddie Mac buy these qualified loans from banks, mortgage lenders, and savings and loan institutions, then package them into securities, and sell them to investors. It’s a process that allows the various lending institutions to free up more money and continue lending to new borrowers. In essence, Fannie Mae and Freddie Mac keep the mortgage lending lifecycle moving.
Conforming loans may be harder to qualify for, but they offer lower rates to qualified borrowers. They give lending institutions a ready funding source for their mortgage applicants and keep more money circulating through the economy than otherwise would be available. Jed and Grannie would be proud!
Neil Funsch has been a mortgage broker for 18 years, the last four in Park Hill. He can be reached at 303-229-2684 or neil.funsch@gmail.com.