Most people hear the terms Fannie Mae, Freddie Mac and FHA but have no idea what each GSE (Government Sponsored Entity) does and their role in the mortgage note business. Here is a clear concise explanation of what these GSEs do and what they do not do.
- Fannie Mae was a result of 1938 Great Depression to encourage home ownership.
- Freddie Mac was a result of government trying to increase liquidity and provide a secondary market for loans.
- Fannie Mae and Freddie do not originate loans.
- Fannie and Freddie only buy loans from banks, credit unions, etc which conform to their guidelines
- They provide liquidity by buying mortgages from banks and investors and bundle into mortgage backed securities (MBS) and sell to investors on Wall St.
- Without Fannie Mae and Freddie Mac the rates for buying a home would be much higher since not enough private sector demand for mortgages.
- Fannie Mae and Freddie Mac also buy FHA loans and not just conforming loans. Ginnie Mae the name given to the security backed by FHA loans.
- FHA is an office of HUD which insures mortgages for single family residences (SFR).
- FHA does not originate loans and FHA does not buy loans like Fannie Mae or Freddie Mac.
- FHA loans are loans written by bank using the guidelines set forth by FHA which are typically much looser and more flexible a Fannie Mae or Freddie Mac “conforming” loans.
- Loans meant to help less well off borrowers. However, no income limits and you don’t have to be a first time home buyer. Lower down required but mortgage insurance (PMI) issue.