Fannie Mae and Freddie Mac

When you think of mortgages and how they are sold, you most likely are thinking about the typical scenario of a person or family obtaining a mortgage from a lender in order to purchase their home. Of course, mortgages are also obtained to buy vacation properties, commercial buildings, and land. Additionally, there is something called a secondary market that exists within the mortgage buying world. In this market, mortgage lenders sell mortgages as a cash flow opportunity- using the money earned from selling the mortgages in this secondary market to create more mortgages. Most of a mortgage lender money is earned from points and fees that are associated with the mortgage, so the more mortgages a lender is able to make, the more money they are able to secure for their business! Who buys the mortgages on the secondary market? The two biggest purchasers of these mortgages actually began as governmental enterprises, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) and later turned into privately held companies. The purpose of both Fannie Mae and Freddie Mac is to enable more people with lower incomes the ability to obtain a mortgage. Without these programs, the people who purchase loans from them typically would not have a high enough credit score or strong enough income and credit history to purchase a mortgage from a lender. Most mortgage lenders see these families as high risk, and are unable to provide financing to them. Fannie Mae and Freddie Mac do not lend money directly to individuals. Instead, they work with mortgage lenders and banks to help create mortgage programs that more people can qualify for, and help lenders obtain necessary cash flow. Both Fannie Mae and Freddie Mac purchase the mortgages from banks and lenders, and sell them in the bond market as securities. This accomplishes two things: MBS (mortgage-backed securities) typically offer the investors a strong return, and mortgage lenders receive cash flow in order to create more mortgages for individuals and families who qualify for traditional mortgage programs. As with any mortgage program, Fannie Mae and Freddie Mac have a loan limit. Currently, the conventional loan limit is set at $417,000 for single-family homes in the United States, with loans that are higher than that receiving the title of “jumbo loans”, and cannot be financed using Fannie Mae or Freddie Mac programs. The loan limit is set every year in January, and is raised to reflect the changing economy. Two family homes and other dwellings have different limits, and mortgages in high cost areas like Alaska and Hawaii have an entirely separate loan limit schedule.