What is a fannie mae and freddie mac loan

• Fannie Mae - Wikipedia.
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Unlike Fannie Mae, Freddie Mac did not have a government guarantee for its loans. It wanted to transfer the risk of default.

It then sold these securities to hedge funds, pension funds, and individual investors. It purchased mortgages insured by the FHA. When Fannie Mae bought the loans from banks, it gave them more money to lend. Congress transformed Fannie Mae into a company in Congress needed the funding to finance the Vietnam War.

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Freddie Mac focused on encouraging banks to create year mortgages to avoid keeping the loans in their books for thirty years. That tied up too much money and was risky for the banks. This meant they had to be profitable for the shareholders while creating the secondary market that made the resale of mortgages feasible. This was more than double their share of the mortgage market revealing the extent to which private mortgage financing had dried up.

In early , Fannie Mae and Freddie Mac stepped in to guarantee more subprime mortgages to reassure the housing market. As the subprime mortgage meltdown continued, the Federal government had to intervene to rescue Fannie Mae and Freddie Mac themselves.

The U.

That means all of their profits go to the U. But do you know what it does and how it operates?

It was established to stimulate the housing market by making more mortgages available to moderate- to low-income borrowers. Fannie Mae does not originate or provide mortgages to borrowers. It purchases and guarantees them via the secondary mortgage market.

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 mortgages it purchases and guarantees must meet strict criteria. Subprime loans have higher rates than prime rate loans and are offered to borrowers with poor credit who are considered a higher risk by the lender.

For related reading, see: Subprime Lending: Helping Hand or Underhanded? After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities MBS. It guarantees payments of principal and interest on its MBS. The other firms arose later, based on the GSE model, so that objective was achieved. The GSEs are unwilling to give it up, and they have become so powerful politically that they have managed to thwart the several attempts that have been made to take it away. This reflects their relatively low funding costs, part of which is passed through to borrowers.

As part of their public responsibility, the GSEs commit to purchase specified numbers of such loans. How many would not be made without the GSEs, however, is not clear. As a taxpayer, on the other hand, you have a cause for concern.

What Kind of Support Do the GSEs Receive From Government?

If the GSEs ever have a financial disaster, the Government will have to bail them out and you and I will be on the hook for the cost. Very few informed observers believe that HUD is up to the task. It could be done by 1 revoking the credit line the GSEs now have with the Treasury, and b providing an explicit Federal guarantee of all debt and GSE guarantees outstanding on the date the credit line is revoked.

An explicit guarantee on the old claims would prevent any repercussions in the financial markets, yet put the markets on notice that news ones are not guaranteed. Over time, the volume of guaranteed claims would gradually decline. Shop For a Mortgage. Explore Kosher Reverse Mortgage Options.