You have heard of Fannie Mae, also known as the Federal National Mortgage Association (FNMA), and Freddie Mac, Federal Home Loan Mortgage Corporation (FHLMC), especially if you're looking to buy a home or refinance, but you may not be aware of the role that these investors play in the housing industry. Understanding how mortgage loan investors, like Fannie Mae and Freddie Mac, operate will help you better understand the dynamics of the housing market and the overall mortgage application process.
What Exactly are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are government-sponsored enterprises or GSE. Mortgage Lenders (banks, independent mortgage companies, mortgage brokers, or credit unions) sell their conventional home loans to an investor like Fannie Mae or Freddie Mac. Once a mortgage lender (which may be an independent mortgage bank, credit union, mortgage broker or bank) originates your home loan, it is bundled together with other mortgages and sold as mortgage-backed securities to an investor. This process provides the mortgage markets with crucial liquidity and stability, enabling the issuing of new loans and maintaining home affordability. This allows new loans to be written and attracts new secondary mortgage market investors through offering packaged mortgage-backed securities and guaranteeing the timely payment of principal and interest on the underlying mortgages.
How Fannie Mae (FNMA) and Freddie Mac (FHLMC) Loans Operate
Fannie Mae and Freddie Mac do not directly offer mortgages because they are the loan investor rather than an originator or servicer. The loan process begins when your lender locks your mortgage interest rate for a specific program with Fannie Mae or Freddie Mac. This means that the lender intends to originate the loan under that investor's guidelines and sell the closed loan to that investor. The originator completes the loan underwriting, closing, and funding process. After a loan has been closed, Fannie Mae or Freddie Mac purchases these loans from the mortgage lender, provided it meets their requirements.
Fannie Mae and Freddie Mac Conforming Loan Parameters
Federal Housing Finance Agency (FHFA) regulations known as "conforming loan restrictions" are put forth for Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac only purchase these loans, commonly referred to as conforming mortgages, which adhere to the conforming loan guidelines. The collateral for the mortgage loan is the house itself. MBSs (Mortgage-Backed Securities), are manufactured by Fannie Mae from these loans and made available to investors on the free bond market.
Servicing the Loan
Once your originating lender closes and funds the loan and subsequently sells it to an investor, the servicing of your mortgage begins. Fannie Mae and Freddie Mac, the loan investors, do not service the loans. The servicer of your mortgage may be the same company who originated it, like Standard Mortgage or it could be a different company. Each month you make your principal and interest payments as well as escrow payments to your servicer and they keep track of your escrow account and remit the principal and interest payments to the loan investor, Fannie Mae or Freddie Mac. The servicer is servicing your loan on behalf of the investor. The servicing of your loan can be sold to a different servicer, but the investor of your loan will not change. At Standard Mortgage, we service all our loans and do not intend to sell the mortgage servicing right.
For over 90 years the experts at Standard Mortgage (NMLS#:44912) have been helping home buyers and homeowners with their mortgage needs.
