Fannie Mae and Mortgage Sales: What Homebuyers Need to Understand

Fannie Mae, formally known as the Federal National Mortgage Association, is a crucial player in the United States housing finance system. As a government-sponsored enterprise (GSE), Fannie Mae operates in the country’s massive secondary mortgage market to provide liquidity, affordability, and stability to the mortgage market. 

Does Fannie Mae sell mortgages?

Fannie Mae does not sell mortgages. As a government-sponsored enterprise operating in the secondary mortgage market, Fannie Mae purchases loans from primary lenders, then either holds them as investments or bundles them into mortgage-backed securities for sale to investors. Its role is to provide liquidity and stability to the mortgage market, not to compete with lenders.

What is Fannie Mae?

Fannie Mae was founded in 1938 during the Great Depression as a New Dealeffort to revive the devastated housing market by making homeownershipmore accessible. It started out as an agency within the federal government before being privatized as a publicly-traded company in 1968. However, after being bailed out during the 2008 financial crisis, Fannie Mae was placed under conservatorship of the Federal Housing Finance Agency (FHFA). Today, while still a shareholder-owned company, it continues to operate under close government supervision for the public benefit.

As a government-sponsored enterprise (GSE), Fannie Mae plays a crucial role in the United States housing finance system. It works to ensure liquidity and stability in the massive secondary mortgage market where existing mortgage loans and mortgage-backed securities (MBS) are bought and sold. As one of the nation’s largest financial institutions, Fannie Mae provides the necessary capital to keep mortgage credit flowing to homeowners and homebuyers nationwide.

How Does Fannie Mae Operate?

The key way Fannie Mae promotes liquidity in the mortgage market is by purchasing conventional loans from primary lenders like commercial banks, mortgage companies, and other loan originators. This gives lenders the ability to issue new mortgage loans while getting old ones off their books. 

Fannie Mae generates profits by packaging purchased loans into mortgage-backed securities (MBS) and selling them to various capital market investors like pension funds, hedge funds, and insurance companies. The securitization process replenishes Fannie Mae’s capital reserves so it can further invest in the mortgage market.

To manage risk, Fannie Mae has strict standards for the loans it will purchase. These loans are known as conforming loans because they must conform to underwriting guidelines on borrower creditworthiness, loan amounts, down payments, mortgage terms, property appraisals, and other factors. Loans that do not meet the conforming criteria are called non-conforming loans.

Does Fannie Mae Sell Mortgages?

An important thing to understand is that Fannie Mae is not a direct lender – it does not originate or service mortgage loans. Rather, it is a secondary market investor that buys mortgages from primary mortgage lenders. In other words, Fannie Mae does not sell mortgages to the public or compete with lenders. Its role is to inject liquidity into the mortgage system by purchasing loans for its retained investment portfolio and MBS issuances. This in turn allows lenders to originate more loans.

Why Doesn’t Fannie Mae Sell Mortgages?

Fannie Mae does not sell mortgages to consumers for several key reasons:

• It is not a mortgage lender or originator – it buys loans from primary lenders after origination.
• Its key function is to hold mortgages as investments and bundle them into mortgage-backed securities to sell to investors. This provides liquidity to the market.
• Selling individual mortgages would undermine its securitization model which is critical to providing scale capital to the mortgage market. 
• It would directly compete with lenders if it sold mortgages, which is not its purpose as a GSE.

So in summary, Fannie Mae does not sell mortgages because its role in the secondary mortgage market is to buy loans for investment purposes, not compete with primary lenders. Providing liquidity through securitization is how it fulfills its mission.

What Does Fannie Mae Do with Purchased Mortgages?

When Fannie Mae purchases conventional loans from mortgage lenders, it typically places them into one of two categories:

1. Mortgage portfolio investments – Fannie Mae holds some purchased loans as interest-earning assets in its retained mortgage portfolio. This provides an ongoing stream of income from mortgage payments.
2. Mortgage-backed securities (MBS) – Most purchased loans are repackaged into mortgage-backed securities which are pooled bonds sold to a wide array of capital market investors. This securitization process is a major way Fannie Mae provides liquidity to the mortgage market. Investors in Fannie Mae MBS receive principal and interest payments as homeowners pay their mortgages.

No matter whether the mortgage is held as a portfolio investment or converted into an MBS, the key point is that Fannie Mae purchases and holds the loan rather than selling it directly to other consumers. This supports liquidity for lenders while also generating profits for Fannie Mae shareholders.

The Impact of Fannie Mae on the Mortgage Market

By providing a stable secondary market for loan originators to sell mortgages into, Fannie Mae delivers major benefits to both lenders and borrowers:

For lenders, Fannie Mae:

• Creates an ongoing source of capital by purchasing loans in bulk
• Allows faster turnover of capital by getting old loans off their books 
• Provides guarantee on payment of loan principal and interest
• Establishes standards for loan products and underwriting

For borrowers, Fannie Mae:

• Promotes availability and affordability of mortgage credit 
• Provides stability and confidence in the mortgage market
• Allows lenders to offer diverse competitive loan products 
• Keeps mortgage interest rates relatively low
• Reduces down payment and credit score requirements for conforming loans

So in essence, Fannie Mae is an intermediary between Wall Street and Main Street. Its activities provide an essential link between the capital markets that supply lending capital and the consumers who demand mortgages. This is why it is considered integral to the smooth functioning of the enormous US housing finance system.

How Does Fannie Mae Benefit Lenders and Borrowers?

As a government-sponsored enterprise, Fannie Mae’s core purpose is to strengthen the secondary mortgage market in order to facilitate homeownership. While it has shareholders, it also has mandates to operate in the public benefit. Two major beneficiaries are lenders and borrowers:

For lenders, Fannie Mae provides:

• Immediate cash flow by purchasing closed loans in bulk
• New capital to issue additional mortgage loans
• Reduction in lending risks via guaranteed loan payments
• Standardization of loan products through conforming guidelines

For borrowers, Fannie Mae enables: 

• Wider availability of mortgage credit nationwide
• Lower interest rates relative to non-conforming loans 
• Lower down payment options on conforming loans
• Fixed-rate mortgages and competitive ARM loans
• Alternate credit score models to expand access to credit

So in summary, Fannie Mae’s core purpose is to add liquidity, stability, and affordability to the enormous US mortgage lending system, which benefits both lenders and everyday borrowers.

Frequently Asked Questions about Fannie Mae and Mortgages

1. Can I Buy a House Directly from Fannie Mae?

No, Fannie Mae does not directly sell or finance properties to consumers. However, you may be able to buy a Fannie Mae-owned property through their REO (real estate owned) auction site HomePath.com. Fannie Mae foreclosed properties are listed there for purchase.

2. How Can I Find Out if My Mortgage is Owned by Fannie Mae?

If your mortgage is owned by Fannie Mae, you would receive a formal notification letter from your mortgage servicer. You can also call your servicer directly to ask if your loan was sold to Fannie Mae. Knowing the owner of your mortgage does not change its terms.

3. What Happens if My Mortgage is Sold to Fannie Mae?

Typically nothing changes – Fannie Mae does not service the loans it purchases. You will still make payments to your existing servicer. The terms, interest rate, and loan balance do not change. The only difference is who ultimately owns the mortgage.

4. What Types of Loans Does Fannie Mae Purchase?

Fannie Mae purchases conventional, conforming loans – meaning loans that adhere to its underwriting standards for loan amount, down payment, borrower credit profile, and other requirements. Loans above the conforming limit and government loans (FHA, VA) are not purchased.

5. How Does Selling Loans to Fannie Mae Affect Interest Rates?

By providing lenders access to capital markets, Fannie Mae increases market liquidity which exerts downward pressure on interest rates. Conforming mortgages sold to Fannie Mae typically have lower rates versus non-conforming jumbo loans that stay on lender balance sheets.

Conclusion

In summary, Fannie Mae plays a vital role in supporting the United States housing finance system as one of the nation’s largest secondary mortgage market institutions. It provides key benefits to lenders and consumers by injecting liquidity into the mortgage ecosystem through its large-scale purchases of home loans for securitization and portfolio investment. This gives primary lenders access to capital markets and allows them to meet America’s demand for affordable mortgage financing. While not perfect, Fannie Mae remains an important mechanism for facilitating homeownership.

Frequently Asked Questions(FAQ)