Fannie Mae, Freddie Mac and FHA, what are the differences?

Lately, Fannie Mae, Freddie Mac and FHA have all been getting a lot of attention.    These important government entities have been around a long time, working behind the scenes and although you may have heard of them, chances are, you may not understand the roles of these organizations in relation to the mortgage market and how they are different from one another.

Before we delve into the differences, let's first take a look at how these organizations are similar.  Neither Fannie Mae, Freddie Mac or FHA is a bank, they don't lend money.  FHA insures loans and Fannie Mae and Freddie Mac are investors, they purchase loans from the banks who originate them as soon as they are "funded".

FHA, short for Federal Housing Administration, was actually put into place to help boost home sales during the depression.  The Federal Government, by guaranteeing the loans, shares the risk that a private lender would normally shoulder alone and makes it possible for these private lenders to be able to offer loans to clients who may be considered "higher risk".  A borrower who may be considered "higher risk" does not necessarily have credit issues, it may just be someone with a lower income or a limited downpayment. 

Fannie Mae and Freddie Mac are both investors in the secondary loan market.  They are partially funded by the government and partially supported by the public.   Fannie Mae and Freddie Mac regulate the "conforming " loan market, so they do wield quite a bit of power.  When a bank underwrites a conforming loan (sometimes called a conventional loan) the guidelines that bank will follow are set forth by Fannie and Freddie.   Although Fannie Mae or Freddie Mac may own the "note", the originating bank will retain the servicing rights (collecting payments, re-finances, and customer service issues).    This is why you will never make a mortgage payment to Fannie Mae or Freddie Mac!

 

Topics: Real Estate