Most people have never heard of the Federal National Mortgage Association (FNMA), also known as Fannie Mae. But this government-sponsored enterprise (GSE) plays a pivotal role in the U.S. housing market by providing financing for loans used to purchase homes. In this blog post, we’ll explain how Fannie Mae works and discuss some of the benefits it offers to borrowers and investors.
What is Fannie Mae?
Fannie Mae is a GSE created by Congress in 1938 to help ensure that lenders had a reliable source of funding for home mortgages. Today, Fannie Mae still serves that same purpose by buying loans from approved lenders, packaging them into securities, known as mortgage-backed securities or MBS, and selling them to investors on the secondary market. By doing so, Fannie Mae provides lenders the liquidity they need to continue making home loans.
Benefits for Borrowers
For borrowers, one of the main benefits of Fannie Mae is that it makes it easier to obtain financing for a home purchase. That’s because Fannie Mae-backed loans are considered “conforming” loans, which means they meet certain standards set by the government (such as a maximum loan amount). As a result, these loans are more attractive to lenders and often come with lower interest rates than “non-conforming” or “jumbo” loans not backed by Fannie Mae.
Benefits for Investors
Fannie Mae also offers several benefits for investors. First and foremost, investments in Fannie Mae securities are relatively safe since they’re backed by the full faith and credit of the U.S. government. Additionally, these securities tend to offer higher yields than other types of fixed-income investments, such as Treasury bonds. Finally, because Fannie Mae purchases loans from multiple lenders across the country, investors can get exposure to different geographic areas through a single security.
In conclusion, the Federal National Mortgage Association (FNMA), or Fannie Mae, is a GSE that serves an important role in the U.S. housing market by providing financing for home loans. Borrowers benefit from Fannie Mae-backed loans because they often come with lower interest rates than non-conforming or jumbo loans not backed by Fannie Mae. Investors benefit from these securities because they offer relatively high yields and exposure to different geographic areas through a single security while also being backed by the full faith and credit of the U.S government.
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