Fannie Mae: Loans, Rules, and Programs

Fannie Mae, the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise (GSE) chartered by Congress to stimulate homeownership and provide liquidity to the mortgage market. Established in 1938 during the Great Depression as part of the New Deal, Fannie Mae helps low- to moderate-income borrowers obtain financing for a home.

What Fannie Mae Does

As a secondary mortgage market participant, Fannie Mae does not originate mortgage loans. Instead, it keeps funds flowing to lenders by purchasing or guaranteeing mortgages issued by credit unions, banks, thrifts, and other financial institutions. By investing in the mortgage market, Fannie Mae creates liquidity for lenders, allowing them to underwrite or fund additional mortgages. In 2022, Fannie Mae provided $684 billion in liquidity to the mortgage market.

It is one of two large purchasers of mortgages in the secondary market. The other is its sibling Freddie Mac, or the Federal Home Loan Mortgage Corporation, also a GSE chartered by Congress.After purchasing mortgages on the secondary market, Fannie Mae pools them to form a mortgage-backed security (MBS). An MBS is an asset-backed security secured by a mortgage or pool of mortgages.

Fannie Mae’s mortgage-backed securities are purchased by institutions, such as insurance companies, pension funds, and investment banks. It guarantees payments of principal and interest on its MBSs.Fannie Mae also has a retained portfolio, which invests in its own and other institutions’ mortgage-backed securities. Fannie Mae issues debt, called agency debt, to fund its retained portfolio.

History of Fannie Mae Stock

Fannie Mae has been publicly traded since 1968. Until 2010, it traded on the New York Stock Exchange (NYSE). Following the Great Recession and its impact on the housing market, Fannie Mae was forced to delist its shares for failure to meet the minimum closing price requirement mandated by the NYSE. Fannie Mae now trades over the counter.

In 2008, Fannie Mae and Freddie Mac went under the conservatorship of the Federal Housing Finance Agency (FHFA).In September 2019, the Treasury and FHFA allowed Fannie Mae and Freddie Mac to keep their earnings to shore up their capital reserves as a step toward transitioning the two out of conservatorship.

Fannie Mae Loan Requirements

The mortgages that Fannie Mae purchases and guarantees must meet strict criteria. The limit, set by the FHFA, for a conventional loan for a single-family home in 2023 is $726,200 for most areas and $1,089,300 for high-cost areas, including Hawaii and Alaska.

Approved lenders must meet eligibility and underwriting criteria that ensure the credit quality of the financing and comply with the Statement on Subprime Lending issued by the federal government, which addresses risks associated with subprime loans, such as variable rates, limits on interest rate increases, borrower income documentation, and product features that make frequent refinancing of the loan likely.

How to Apply for a Fannie Mae-Backed Mortgage

Borrowers complete a Uniform Residential Loan Application and gather and provide financial information and documentation. This includes employment and gross income and statements, such as a W-2 or 1099. Applicants provide monthly debt obligations, such as balances on credit cards, car payments, alimony, and child support.

Generally, lenders prefer to follow the 28/36 Rule meaning a household should spend no more than 28% of monthly income on housing expenses and no more than 36% on debt servicing in mortgages and car loans. Fannie Mae will accept a maximum debt-to-income (DTI) ratio of 36% but can be as high as 45% if the borrower meets credit score and reserve requirements.

If the DTI ratio is too high, borrowers can make a larger down payment, reducing monthly costs. While a 20% down payment is considered ideal, some borrowers may be able to put as little as 3% down.Homebuyers must also meet minimum credit requirements for Fannie Mae-backed mortgages. For a single-family home that is a primary residence, a FICO score of at least 620 for fixed-rate loans and 640 for adjustable-rate mortgages (ARMs) is required.

Loan Modifications and Fannie Mae HomePath

Loan modifications change the conditions of an existing mortgage to help borrowers avoid default, ending up in foreclosure, and ultimately losing their homes. Modifications can include a lower interest rate and extending the loan term, which would lower monthly payments.

When foreclosures arise on mortgages in which Fannie Mae is the owner or investor, or when properties are acquired through deeds instead of foreclosure or forfeiture, Fannie Mae attempts to sell the properties promptly to minimize potential impacts on the community. HomePath by Fannie Mae is where home buyers and investors can search for and make offers on these properties. The HomePath program is a way for creditworthy homebuyers to finance new homes.

In some cases, special financing may be available. These include closing cost assistance, 3% down payments, and improvement costs bundled into the loan.HomePath.com advertises properties owned by Fannie Mae, including single-family homes, townhouses, and condominiums. Fannie Mae uses local real estate professionals to prepare, maintain, and list the properties for sale.

Fannie Mae’s RefiNow Program

Fannie Mae offers low-income mortgage holders a refinance option through a program called RefiNow, meant to reduce monthly payments and interest rates. To be eligible, homeowners must be earning at or below 100% of their area median income (AMI).

“Lower-income borrowers typically refinance at a slower pace than higher-income borrowers, potentially missing an opportunity to save on housing costs,” says Malloy Evans, executive vice president of single-family business at Fannie Mae. If homeowners are unsure about whether or not Fannie Mae owns their mortgage, they can visit Fannie Mae’s Loan Lookup Tool.

The RefiNow program requires a reduction in the homeowner’s interest rate by a minimum of 50 basis points and savings of at least $50 in the homeowner’s monthly mortgage payment. Fannie Mae provides a $500 credit to the lender at the time that the loan is purchased if an appraisal was obtained for the transaction, and this credit must be passed on from the lender to the homeowner.

To qualify for RefiNow, a homeowner must meet these qualifications:

• Have a Fannie Mae-backed mortgage secured by a one-unit principal residence.
• Have a current income at or below 100% of the AMI.
• Consistently paid the mortgage payment in the past six months with no more than one missed mortgage payment in the past 12 months.
• Have a mortgage with a loan-to-value ratio of up to 97% and a debt-to-income ratio of 65% or less.

The Bottom Line

Fannie Mae is a government-sponsored entity that buys mortgages that meet standard criteria. By investing in mortgages, Fannie Mae creates liquidity for lenders, including banks, thrifts, and credit unions. Fannie Mae frees up cash for local and national banks to continue extending mortgages.