How Does Fannie Mae Work?

Real Estate Agent with Keller Williams Realty West

In 1938, Fannie Mae was established by the US Government to promote the growth of home ownership by providing a secondary mortgage market.  What is a secondary mortgage market?  Well, the secondary mortgage market exists in the buying and selling of a mortgage from one lender to another.  The bank, or Mortgage Company that provided you with your loan, can turn around and seek to sell your mortgage to a company such as Fannie Mae.  This frees up their cash to make another mortgage loan.  And the cycle of growth is expanded and sustained in this manner.  The idea and concept worked, and today, Fannie Mae has helped millions of Americans achieve the dream of home ownership.  Until recently, Fannie Mae was a part of the US Government, and was overseen by the Housing and Urban Development branch of that government.  Now, however, Fannie Mae is a privately held, stock ownership company that promotes the growth of the housing industry by making it possible for many low-to-middle income Americans to own homes.  Investors just like you and I can purchase stock in the Fannie Mae Corporation, and not only increase our won wealth, but also help to fund the home ownership possibilities for a new generation of Americans.

            In 1968, just thirty years after her government commissioned birth, Fannie Mae became a private company operating with private capital.  She had outgrown her need for federal funding and supervision.  That does not mean, however, that the government does not still closely work with the Fannie Mae Corporation.  It does. The housing industry has continued to grow, and currently the entire mortgage market is experiencing phenomenal success.  Fannie Mae’s focus, however, is still on the low to middle-income American.

Fannie Mae deals only in the secondary mortgage market, this way Fannie Mae Corporation can ensure that money for mortgages is available throughout the 50 states and that as many homeowners as possible can take advantage of home ownership.

            How does Fannie Mae continue to fund the mortgages that she buys?  Through the issuance of mortgage backed securities. These securities known as MBS are issued to investors.  When Fannie Mae issues the MBS, she is guaranteeing the investors a return on their investment, and at the same time, providing a source of funding for issuing further mortgages.   This provides the nation’s lenders with a steady stream of cash to continue to make mortgages available to the consumer.

            How does all this relate to the home of your dreams?  Well, stop just a moment to connect all the dots.  Fannie Mae buys mortgages from your local lender.  The lender receives the proceeds from that purchase, and can then offer a new mortgage to you.  It’s a steady and continual circle of growth.  Why?  Well, Fannie Mae isn’t the only lender in the secondary market.  Insurance companies, pension funds, securities dealers, and other financial institutions buy mortgages on the secondary market.  Who invests in these insurance companies, pension funds and securities dealers?  Where do they get their money?  From taxpayers just like you.  Mortgage holders just like you.  Now can you see how Fannie Mae and other mortgage lenders in the secondary market, work to foster home ownership and community growth, all in one process?

            The primary focus for Fannie Mae, operating under a government directive, is to provide the maximum amount of help to lenders in making mortgage loans to the low, to middle, to moderate income families across America.  Fannie Mae is also involved in a


Comments (2)

Don Sabinske
Don Sabinske, Sabinske & Associates Inc. - Zimmerman, MN
Sabinske & Associates Inc.

Great post.  I had read this in the Wall Street Journal, but most consumers don't read that dreary information.  Thanks for the information to pass along.  I will reblog it later. 

Aug 23, 2010 03:51 PM
Dan Edward Phillips
Dan Edward Phillips, Humboldt and Del Norte Counties, CA - Eureka, CA
Humboldt and Del Norte Counties, CA

Hi Linda and Roland, thanks for posting the background information on Fannie Mae, I enjoyed it!

Aug 23, 2010 05:19 PM