Who is Fannie Mae and Why Should I care?

Many Americans had little idea who Fannie Mae (Federal National Mortgage Association) was prior to 2006, except that they had fairly good bond rates that were considered “safe” investments. Now that the Credit Crisis has uncovered all sorts of facts on how the mortgage market works, most of us should be at least a little knowledgeable about how Fannie Mae affects our lives.

Fannie Mae is a “Government Sponsored Enterprise,” started in 1938 to make sure the home mortgage market had all the funds it needed to extend affordable loans. Fannie Mae does not issue mortgages to individuals. Rather, it agrees to buy packages of loans from direct lenders.

Fannie Mae became a public company in 1968, which in theory meant that the government no longer had to rescue the company if it made bad business decisions. But the public still considered Fannie Mae a quasi governmental company. So after the company started to fail in 2008, it entered into a conservatorship arrangement with the government so that it could receive over $400 billion in funds from the Treasury to continue to buy loans that that private mortgage companies and banks.

The net effect for homeowners is that the Fannie Mae purchase of mortgages kept the mortgage rates down in 2008 and 2009, and helped fuel what housing demand there was. And even today, homeowners need to be watching what the government does with this company for several reasons – it can affect your interest rate and it can affect whether you can get a loan.

With the government meddling to keep rates down, what will happen if that meddling lessens or stops? It seems to follow that interest rates will start to rise to get the attention of private investors willing to buy loans. That could mean a slowdown for the housing industry and potentially an increase in cost for owning a home.

Another important factor to watch is the government (and Fannie Mae) requirements for what loans they will buy. One of those restrictions is the loan size. Most states have a conforming loan limit of $417,000, and higher cost states like California, have higher limits. This restriction has kept interest rates for the so-called jumbo loans higher because they must be bought by capital outside of Fannie Mae.

Fannie Mae also has the ability to tighten or loosen other rules that make it difficult to obtain financing. What income is counted, what rules a condo development has to follow, and what your credit score has to be are some possible levers the company has to control the number and types of loans they will buy. When you don’t fit into those standards, be prepared to pay more to get a loan or worse, to not be eligible for a loan at all.