Instead of making loans to consumers, the government-sponsored entities (GSEs) presently work with primary mortgage lending entities such as bankers and brokers to ensure the mortgage industry has liquidity. On its website, Fannie Mae states,
“We fund our mortgage investments primarily by issuing debt securities in the domestic and international capital markets.”
What this means is that the GSEs assist lenders by bundling existing loans and selling them on the financial market. Instead of waiting for borrowers to repay their loans bit by bit, lenders have immediate access to funds provided by investors. The investors make back their investments as borrowers repay the loans.
Fannie Mae and Freddie Mac are GSEs. Fannie Mae, the Federal National Mortgage Association (FNMA), was established in 1938 in response to the Great Depression. It began as a government agency with the purpose of buying mortgages from lenders who were in financial distress due to the economic disaster. Fannie Mae continued to function as a government agency until 1968, when it became a private shareholder-owned company chartered by the federal government.
Fannie Mae’s offerings for conventional loans include, but are not limited to:
- Ten-, 15-, 20-, 30- and 40-year fixed-rate mortgages
- A number of adjustable-rate mortgages including 1/1, 3/1, 5/1, 7/1 and 10/1
- Interest-only fixed-rate and adjustable-rate mortgages
- Seven-year balloon mortgages
- Bi-weekly financing
- Reverse mortgages
Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC) was established in 1970 in order to prevent Fannie Mae from operating as a monopoly. In a similar fashion, Freddie Mac went public in 1989 with a Congressional charter. Both Fannie Mae and Freddie Mac continue to receive oversight from the Federal Housing Finance Agency (FHFA) which is also responsible for setting annual loan limits. Any loan that goes above those limits is considered to be a “jumbo” loan.
Freddie Mac’s offerings for conventional loans include, but are not limited to:
- 15-, 20-, 30- and 40-year fixed-rate mortgages
- Buy down programs
- Home Possible Mortgages® targeted at new homebuyers, underserved borrowers, low- to moderate-income borrowers and those with a “less than perfect” credit history
- Cash-out refinances
- New construction and renovation mortgages
- Manufactured home financing
- A number of adjustable-rate products based on different indices
- Five- and seven-year balloon mortgages
Ginnie Mae, the Government National Mortgage Association (GNMA), was also created in 1968 under the National Housing Act of 1934. Ginnie Mae also operates in the secondary market, but unlike Fannie and Freddie, it continues to operate as a government entity rather than under a private charter. Ginnie Mae also differs from Fannie and Freddie in its purpose and the role it plays in the market.
Ginnie Mae’s website offers the following about its purpose:
Ginnie Mae does not buy or sell loans or issue mortgage-backed securities (MBS). Therefore, Ginnie Mae’s balance sheet doesn’t use derivatives to hedge or carry long term debt.
What Ginnie Mae does is guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans — mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Other guarantors or issuers of loans eligible as collateral for Ginnie Mae MBS include the Department of Agriculture’s Rural Housing Service (RHS) and the Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH).
The organization goes on to say that “Ginnie Mae securities are the only MBS to carry the full faith and credit guaranty of the United States government.”
Loans eligible for securitization by Fannie and Freddie are identified as conventional, conforming loans. Conventional is the term used to describe any kind of mortgage loan not guaranteed or insured by a government entity such as the Fair Housing Administration or Department of Veterans Affairs. Conforming means the loan meets certain guidelines established by the GSEs, such as maximum loan limits, loan-to-value ratios and debt-to-income ratios.
The conventional market includes banks and other financial institutions that make loans from their own funds. Each lender establishes its own programs and underwriting criteria. The availability of mortgages is limited by the amount of money available for lending.
The GSEs publish their loan limits annually; the limits are based on general and high-cost areas and also the number of units in a property. The following limits are in place for 2010:
MetFund note: These conforming loan limits changed on October 1, 2011.
|Number of Units||Contiguous United States, District of Columbia, Puerto Rico||Alaska, Guam, Hawaii, U.S. Virgin Islands|
Conforming Jumbo and Super Conforming Loans
Maximum loan limits for the conventional, conforming loan market are published by Freddie Mac. The term “jumbo” refers to loans that exceed the maximum loan limits for a specific geographic region. Freddie Mac uses the term “conforming jumbo” to differentiate GSE-eligible jumbo loans from nonconforming jumbo loans and also from conventional, conforming loans in general. Freddie Mac publishes information on its website indicating what products and underwriting factors are in place for conforming jumbo loans.
Super Conforming Loans
The Housing and Economic Recovery Act of 2008 authorized Freddie Mac to publish higher conforming loan limits.
Super conforming loans are used in certain high-cost areas and may be made for amounts up to $625,500 for one-unit properties and as much as $1,202,925 for four-unit properties. Freddie Mac and FHFA’s websites provide more detail on super conforming loans.