With all the talk these days in the world of mortgages about Fannie Mae and Freddie Mac, it is worth considering who they actually are and what do the do?
Fannie Mae is the Federal National Mortgage Association, and Freddie Mac is the Federal Home Loan Mortgage Corporation. They are what’s called government-sponsored entities, GSEs. Although they have recently been taken over by the federal government, they are still publicly traded companies (both are listed on the NYSE). What GSEs do is provide mortgage lenders with funds. The lenders in turn lend the funds to end consumers.
The process, from beginning to end, goes basically as follows: Fannie and Freddie, through the use of investors raise money to provide to lenders, who in turn lend that same money to people who are either purchasing, or refinancing a home. Lenders find borrowers whose income, assets, and credit fall within a previously determined set of guidelines.
Once the loan transactions are completed by the lenders, the GSEs buy back, then package the loans into what are called mortgage-backed securities. The mortgages are packaged together based on the type of loan (30-year fixed, 5/1 ARM, etc.) and on the profile of the borrower.
There could be hundreds or thousands of loans in each security. These securities are then sold, to investors, who trade them as they would other types of securities, in markets around the globe. Most of the mortgages in this country are obtained within the guidelines of Fannie and Freddie.