If you are ready to buy a home, you may have heard your lender throwing around names like Fannie Mae, Freddie Mac, and Ginnie Mae. Who are these people and what do they have to do with your home loan?
They are actually not people at all but nicknames for the biggest government-sponsored mortgage companies. They buy up home loans from private lenders and banks, allowing them to free up capital and turn around and make more mortgages. Fannie, Freddie, and Ginnie have a huge effect on the home loan industry as they essentially set the standards for all U.S. mortgages based on what size and type of loans they will buy from other lenders. Here’s a little more about each company to help you understand their roles:
Officially name the Federal National Mortgage Association (FNMA), Fannie Mae was founded during the Great Depression by FDR to help get the economy moving again. Charged with providing liquidity, stability, and affordability to the U.S. housing market, Fannie is a government-sponsored entity (GSE), meaning it is a private company owned by shareholders that has the backing of the federal government. Fannie buys mortgage loans from large institutions like big banks, and then funds those purchases by bundling the home loans and selling them as smaller cross-section securities on the secondary market.
The Federal Home Loan Mortgage Corporation (FMCC) came along in 1970, expanding government purchases of mortgages from smaller banks and lenders. They also sell these home loans on the secondary market to companies like hedge funds, pension funds, and individual investors. This helps spread the risk of these mortgages out over many investors rather than keeping it all in single companies.
Fannie and Freddie typically buy conventional loans with loan-to-value ratios of 80% or higher, with terms of 30 years or less. Because of the government backing on each loan, the interest rates and other factors are competitive.
Unlike Fannie and Freddie, the Government National Mortgage Association (GNMA) or Ginnie Mae is an actual government-owned corporation. It is part of the department of Housing and Urban Development or HUD and handles all the non-conventional mortgages like FHA, VA, and USDA loans. These loans are all guaranteed by the federal government, giving lenders the confidence and ability to offer lower interest rates, lower down payments, and better overall terms for low to moderate-income families.
So, while you may not deal directly with Fannie, Freddie, or Ginnie, each corporation is instrumental in providing the cash you need to finance a home purchase. Their loan standards affect how much down payment your lender will require, how high your credit score will have to be, and how low of an interest rate you will be offered. Understanding what these government-backed companies do can help you more easily navigate the mortgage process.