Who Are Fannie Mae and Freddie Mac?
Fannie Mae is also known as the FNMA or the Federal National Mortgage Association.
Freddie Mac is also known as the FHLMC or the Federal Home Loan Mortgage Corporation.
What Do Fannie Mae and Freddie Mac Do?
To understand what Fannie and Freddie do now, it is important to first understand the mortgage process historically. Prior to the Great Depression, banks lent money for mortgages and other loans against a deposit reserve pool. A bank would take in deposits, pay interest on the pool at one rate, then lend the same money out to borrowers at a higher rate.
A bank’s capacity to lend money was limited by the amount of money it held on deposit. When a bank’s deposit reserve pool had reached 100% of its lending capacity, it could not issue new loans until more deposits were made to the pool or a loan against the fund was paid off.
Loans in those days carried very high rates of interest. The 30 year fixed rate mortgage loan had not been introduced yet, so most home loans could only be fixed for a 10-15 year period.
Fannie Mae was founded in 1938, and later in 1970, Freddie Mac was founded. These organizations are government sponsored enterprises (GSE) who serve as intermediaries between the investors who buy the mortgages and the lenders who fund consumer mortgage loans. Fannie and Freddie are responsible for transferring money from an investor to a lender, who in turn lends it to mortgage consumers. Once a loan is issued to a borrower, the lender then returns the mortgage account to Fannie or Freddie, and it is bundled with others into a mortgage backed security. These securities are sent to investors to create new lender funding, thus beginning the cycle again.
What Was The Mortgage Meltdown?
Over a 10-15 year period leading up to 2007, mortgage loan guidelines became progressively looser. As a result, some lenders issued a greater number of loans to less qualified borrowers. Investors continued to buy these loans, so when economic conditions and real estate values began to deteriorate in the U.S., the walls of the mortgage industry began to crumble. Investors and economies worldwide felt the impact and the federal government ultimately took over Fannie Mae and Freddie Mac to ensure these events would never happen again.
While FNMA and FHLMC were not responsible for the egregious lending practices that shattered the mortgage market, they did contribute by purchasing limited income verification loans. However, these reputable organizations were never responsible for funding sub-prime mortgages to borrowers with low credit scores and poor payment histories.
How Mortgage Lending Works Today.
In light of the events prompting the 2007 mortgage industry meltdown, the country’s mortgage lending guidelines became more conservative. Although many of the pre-2007 mortgage loan products have either been eliminated or changed, there are still excellent loan options available for first time borrowers, recurring purchasers and those who would like to refinance a mortgage loan. However, qualification for these mortgage products is now reserved for the borrowers who prove they have the highest likelihood of repaying a loan.
If you would like more information about Poli Mortgage Group’s lending programs, please contact us using our convenient web inquiry form or call us direct at 781.801.1400 to speak with a qualified Poli Mortgage loan specialist.