Fannie Mae home loans (the Federal National Mortgage Association) were created for the purpose of helping less fortunate families obtain mortgages. It was originally a New Deal-era government program, but in 1968 it became a GSE (government sponsored enterprise). It is now owned by shareholders rather than the government.

Freddie Mac (the Federal Home Loan Mortgage Corporation) is actually meant to get more funds to the lenders so that they will be able to give out more home loans. It was originated in 1970, and was never actually part of any government program. It was a government-sponsored enterprise from the time of establishment.

The main objective for GSEs is to make credit more available while at the same time reducing costs in specific financial areas like the home mortgage market. This is the purpose of Fannie Mae and Freddie Mac.

In order to understand how these two institutions operate, you must first understand what a secondary mortgage market is. Both Fannie Mae home loans and Freddie Mac work with this industry. In a secondary mortgage market the banks actually sell mortgages to securitizers. The loans then get grouped together and sold to investors as securities. In this scenario, Fannie Mae and Freddie Mac are the securitizers.

Even though both institutions fill the same role, they are in competition with each other and so they have different ways of doing business. What they do is essentially perform the role of middle men. By purchasing loans, the bank ends up having more capital for mortgages. This is how the mortgage market keeps running.

The theory is that when the bank groups many loans together and sells them, they are offering a reduced risk. The reason being that the investor won’t be quite as affected by one loan defaulting since there will be others that can pick up the slack. Investors see safety in this arrangement. The only time this is a poor arrangement is during a real estate meltdown (like in 2008) in which many people are having trouble paying their mortgages.

Both of these institutions keep some of the mortgages for themselves instead of selling them. Another way that they get money is from the fees paid to them for guaranteeing mortgage repayments. These fees are their main way of obtaining income.

Even though they are government controlled, neither Fannie Mae nor Freddie Mac gets federal funding.

There are no major reforms scheduled for Fannie Mae or Freddie Mac until after the main issues in the financial market come to a close. However, both institutions are involved in Obama’s Hope for Homeowners and Making Home Affordable programs. The intention of these programs is to get the housing market stable again. This is meant to happen through the refinancing of home loans, especially for those who are facing foreclosure.

Fannie Mae and Freddie Mac have are such an important part of the mortgage funding market that they are almost too big to ever fail. It has been considered that Fannie Mae home loans and Freddie Mac be put into total privatization and sever their ties to the government, however nobody knows if this will actually happen.

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Category: Finances
Keywords: Fannie Mae home loans