When a lender originates a mortgage loan, it can either keep the loan in its portfolio or sell the rights to the mortgage payments on the secondary market. If the lender decides to sell the loan, in many cases, Fannie Mae or Freddie Mac will purchase it. These two government-sponsored enterprises (GSEs) jointly hold over half of all outstanding home mortgage debt.

Once Fannie Mae buys a loan, it bundles this loan with other loans then sells the rights to the loan payments in the form of mortgage-backed security. Investors—typically insurance companies, pension funds, and investment banks—that buy mortgage-backed securities (MBS) from Fannie Mae are actually buying the right to a portion of all the payments made on a particular bundle of loans.

The investors pay Fannie Mae a small fee in exchange for a guarantee that they will be paid even if the borrower defaults on the mortgage.

Fannie Mae also invests in its own mortgage-backed securities as well as the MBS issued by other institutions, called Fannie Mae’s retained portfolio. This is funded by agency debt, which is debt implicitly guaranteed by the federal government. If Fannie Mae is unable to pay its obligations, it can borrow directly from the U.S. Treasury (which it does so regularly).

A Brief History of Fannie Mae

Fannie Mae and its sibling Freddie Mac (the Federal Home Loan Mortgage Corporation) are the two largest mortgage buyers on the secondary market. Despite this, Fannie Mae does not make loans; it is not a lender.

Fannie Mae’s former headquarters in Washington, D.C. Source: Wikipedia

Fannie Mae’s history goes back to the Great Depression. It was created as part of the New Deal with a mandate to help low- to middle-income borrowers become homeowners and thus reinvigorate the housing market.

After receiving $187 billion in bailouts due to the 2008 financial crisis, the federal government changed Fannie Mae’s status. From a fairly autonomous private organization, it became one under the direct supervision and control of the federal government with The Housing and Economic Recovery Act of 2008. This established the Federal Housing Finance Agency (FHFA), which placed Fannie Mae and Freddie Mac under conservatorship to preserve their assets and restore the enterprises to solvency.

The FHFA has regulatory and oversight authority over Fannie Mae and Freddie Mac. Under its supervision, the two enterprises repaid the Treasury for their bailouts. In 2019, the Trump administration released a plan to end Fannie Mae’s conservatorship and restore its status as a privately owned GSE.

Fannie Mae does not guarantee loans in the same way that other programs, such as FHA and VA, guarantee loans.

An FHA-backed mortgage, for example, the lender is made whole if the borrower defaults on the loan.

On the other hand, Fannie Mae buys conventional mortgages that conform to its lending requirements, hence the terms “conforming” and “non-conforming” mortgages. The guarantee is not to the lender, but rather to the investor who purchases the MBS.

Generally speaking, Fannie Mae only buys mortgages that meet the following requirements:

• The borrower must have a credit score of at least 620.
• The borrower’s debt-to-income ratio must be 50% or less.
• The borrower has paid a down payment of between 3% and 5%.
• The loan amount is below the limit for the borrower’s location (Fannie Mae does not buy jumbo loans).

Further Reading: Understanding Fannie Mae Guidelines

Although Fannie Mae invests in mortgages, it operates several programs to benefit buyers, current owners, and renters, including:

HomeReady

The Fannie Mae HomeReady program is available to first-time and repeat buyers and current homeowners. It allows individuals to buy or refinance a property with 3% down or 3% in equity. This is a program designed to help low- to moderate-income borrowers; only those making 80% or less of the area median income qualify for HomeReady.

HomePath

When Fannie Mae acquires properties through deed-in-lieu or foreclosure, it lists them on the HomePath site. Buyers and investors can search available properties and finance them through HomeReady. In many cases, special programs may lower closing costs and even bundle the cost of repairs and improvements into the loan.

Tenant-in-Place Program

With the Tenant-in-Place Program, renters occupying a property under foreclosure by Fannie Mae may be able to stay in their home by signing a lease with Fannie Mae at current market rates.

Mortgages for investment properties typically do not qualify for Fannie Mae’s HomeReady program. However, there is an exception for multi-unit properties when the borrower intends to live in one of the units.

The requirements for these loans typically include:

• A credit score of 620 or higher.
• Income limits in most areas.
• Down payment of 15% for duplexes and 25% for properties with three or more units.
• The property must be the borrower’s primary residence and they reside in it for at least one year.

Fannie Mae is an important GSE that provides much-needed liquidity to the U.S. housing market by purchasing mortgages from banks and non-bank lenders, repackaging them as mortgage-backed securities, and selling them to investors on the secondary market.

Without Fannie Mae’s involvement in the mortgage and housing industry, many lenders would be unwilling and unable to extend loans under the credit and underwriting standards that they currently use.