Saturday, February 21, 2009

Fannie, Freddie and Ginnie…Explained

Did you ever wonder who these “people” were that had so much to say about the state of our economy? Well, Fannie, Freddie and Ginnie aren’t people, they are institutions. They are the shortened names for Fannie Mae (FNMA-Federal National Mortgage Association), Freddie Mac (FHLMC -Federal Home Loan Mortgage Corporation) and Ginnie Mae (GNMA-Government National Mortgage Association). They are the big three, and they buy the majority of mortgages for all homes across the nation.

The names Freddie and Fannie are all over the place lately. It’s quite common to hear these names on the nightly news on a regular basis. Or you see them online on your favorite news website. Ginnie Mae, not as much. So what exactly are these entities? And what do they have to do with mortgage lending?

These days, you can talk to practically any mortgage lender, they verify your life history and you find yourself owning a home. But you rarely make your mortgage payment to that original lender after an interim period. That’s because lenders make most of their money by selling your loan and it’s servicing.. And more often than not, whatever company you make your payment to doesn’t own your loan. It is the “servicer” of that loan. It is called your servicer because it is simply servicing your loan for the institution that actually owns it.

What happens is your loan gets sold to another company that sells it to one of the big three, or sometimes the company you got your loan from originally sells it directly to one of the big three. Freddie, Fannie and Ginnie buy “pools” of loans. Loans quickly become “pooled” into groups of loans of similar size, interest rate and type. The servicer gets a monthly fee from the institution for servicing your loan and processing your payments. This fee is small (about 3/8 of a percent), but if your pool gets big enough, it can create a tidy sum of income when sold to Fannie, Freddie or Ginnie. There are companies that service billions of dollars of loans. You might have heard lately in the news that some of these servicing portfolios didn’t perform. That’s created a little bit of a headache lately in the mortgage world.

The entire system of mortgages (originators, brokers, banks) is designed to create these pools because so much income can be generated from servicing. When enough loans are made to create a pool, the company sells the loans to Freddie, Fannie or Ginnie, generating more income. This action in turn allows the company to make more loans, and so on and so forth. The whole process begins again.

Freddie, Fannie and Ginnie set underwriting guidelines for lenders to follow that will allow for lower risk loans. The foreclosures of late have caused these guidelines to become less lenient, and in general, more documentation is required to close a loan. The loans in the pools serviced have been reviewed to make sure they are compliant with the guidelines set forth.

So, now you know who Freddie, Fannie and Ginnie are. And now you know why the government cares so much that these three stay healthy.

Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at http://www.kristinmortgage.com/ Home Loans Plain Talk.

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