If you live in the USA and have been willing to purchase a house of your own, brighter chances are that you might have come across the terms “Fannie Mae” and “Freddie Mac” loans. If you’ve been wondering what they are and what purpose do they serve, described below is a thorough insight into the details associated to the term:
Fannie Mae:
“Fannie Mae” is an acronym for Federal National Mortgage Association. Established in the year 1938, Fannie Mae loans were conventionalized through the Federal Home Loan Bank Act. It started off as a governmental intervention, the purpose of which was to purchase the mortgages for the “Federal Housing Administration” and contain them in its books. The basic chronology to how Fannie Mae loans worked was that they bought finances from the banks and in turn, gave them more money to lend. The investments, or the “Mortgages”, were then credited into “Mortgage-Backed Securities”. These derivatives were subsequently sold to individual investors, pension funds, and hedge funds. Although it was established to support the American Dream of the “Home ownership”, it faced some severe repercussions due to severe misconstructions on the policies!
Freddie Mac:
“Freddie Mac” is an acronym for “Federal Home Loan Mortgage Corporation“. Freddie Mac Loans was established in the year 1970. They were aimed to promote the “Mortgage securities” in the security market that was already being operated by Fannie Mae. The underlying ideology that Freddie Mac Loans follows is almost similar to that of the Fannie Mae Loans. The only significant difference between the two is that Freddie Mac procures the loans from relatively smaller ‘thrift’ banks, while the Fannie Mae Loans did so through large commercial banks. Apart from that, Freddie Mac executes the specific tasks and likewise, experienced similar aftermaths during the recession period!
Fannie Mae and Freddie Mac Loans – Conforming and Non-Conforming Loans:
Fannie Mae and Freddie Mac Loans are also called the “Conforming Loans” because they adhere to the guidelines for the “Qualified Mortgages”. They obey the instructions that are established by the Federal Government. Fannie Mae and Freddie Mac Loans are the conventional loans that are only handed out to the borrowers who are most probable to pay them back. The essential requirement for an ideal candidate to be eligible for the loan is that he must be able to make 20% down payments. By doing so, the candidate is considered to have a good credit score, a consistent income, and other requirements that must be fulfilled. Fannie Mae and Freddie Mac Loans do not surpass a certain amount which is most cases $417,000.
Contrary to that, a “Non-Conforming Loan” is the one that a bank puts out, not adhering to the guidelines presented under the policies of the Fannie Mae and Freddie Mac Loans. The loan which is given out is either made to a less creditworthy borrower, or for an amount that exceeds the Fannie and Freddie recommendations!