Fannie Mae: What is FNMA? And What Do They Do?

Updated: 28th Dec 2021 Written by Jordan Blansit
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Even if you’ve never purchased a home, you’ve probably heard of FNMA (Fannie Mae).

This government-sponsored enterprise (GSE) plays a crucial role in funding the housing market and ensuring that homeowners can access a range of affordable loans.

But they don’t lend money themselves, which can leave homeowners confused about where they fit into the picture.

What Is Fannie Mae?

Fannie Mae, or the Federal National Mortgage Association, was created by Congress to help liquidate the housing market.

While it doesn’t originate or underwrite mortgages, it does buy them from banks, credit unions, and other mortgage lenders, injecting cash into the market and driving down interest rates.

Then, it sells and guarantees loans on the secondary mortgage market.

Currently, Fannie Mae – alongside its competitor Freddie Mac – purchase around 66% of America’s mortgages.

Brief History of Fannie Mae

Fannie Mae was founded by Congress in 1938 as a government-sponsored enterprise (GSE) to provide “liquidity, stability, and affordability” in the housing market.

Before FNMA’s inception, mortgages came with strict terms that heavily favored lenders’ rights. Fannie Mae changed the game by stimulating homeownership among low- to moderate-income borrowers.

Initially, Fannie Mae was only able to purchase certain government-backed home loans. Then, in 1968, Congress transitioned the entity into a private corporation that went public after a round of sanctioned investments.

Fannie Mae began buying other types of loans, including the conforming loans it’s known for today.

Fannie Mae’s competitor, Freddie Mac, was chartered two years later to serve a similar market and keep interest rates low.

But in 2008, after guaranteeing a large number of risky subprime loans that underwent foreclosure, the U.S. Treasury was forced to bail out both GSEs to the tune of $190 billion.

Since then, both institutions have been subject to government conservatorship under the Federal Housing Finance Agency, with most of their earnings directed to the Treasury.

Today, shareholders are challenging the legitimacy of the ongoing agreement in court – though Fannie Mae’s day-to-day business remains unaffected.

>> More: Conforming vs. Non-Conforming Loans

What Does FNMA Do?

Though Fannie Mae plays a crucial role in keeping the market liquid, it’s not an originator.

Instead, it works with larger banks, credit unions, and non-bank lenders to establish safe lending guidelines.

Then, it purchases loans that meet these guidelines after closing, which means lenders are more willing and able to fund more mortgages and mortgage refinances down the line.

How Does Fannie Mae Guarantee Loans?

Fannie Mae provides the money that underpins the bulk of conforming mortgages in the United States by buying loans straight from lenders.

This “guarantees” that online mortgage lenders receive their money immediately, rather than over 30 years, which bulks up banks’ cash reserves.

Fannie Mae funds these purchases out of existing capital or borrowing from the U.S. Treasury under post-2008 agreements.

In 2020 alone, Fannie Mae guaranteed roughly $1.4 trillion on the primary market, or around six million homes.

Fannie Mae also guarantees the loans that it sells on the secondary mortgage market. But that’s another matter entirely – one that has little to do with banks and homeowners.

How Fannie Mae and the Secondary Mortgage Market Work

After FNMA fulfills its obligations on the primary market, it bundles hundreds or thousands of similar mortgages together into a mortgage-backed security, or MBS.

These asset-backed securities are sold on the open bond market as mutual funds or exchange-traded funds (ETFs).

Typically, these are purchased by institutions like insurance companies, investment funds, or pension funds that plan to enjoy guaranteed payments of principal plus interest.

Fannie Mae also keeps a “retained” portfolio of mortgage-backed securities on hand, purchased with the aid of agency debt.

Selling these securities creates the secondary mortgage market and ensures that Fannie Mae has enough cash on hand to fund its mortgage-buying endeavors.

However, the practice does come with some risk – if a borrower defaults on their loan, Fannie Mae may be obligated to cover an investor’s loss.

To dampen this risk, FNMA sets various guidelines and regulations for lenders to use when vetting prospective homeowners.

What Are the Requirements for a FNMA Loan?

Though Fannie Mae isn’t a lender, they work with lenders to make sure that homebuyers aren’t handed loans they can’t afford.

This also ensures that Fannie Mae only buys loans it can resell later. Once a lender closes on a loan, Fannie Mae will purchase the loan from lenders – assuming it meets FNMA’s requirements.

Lender Compliance

Firstly, Fannie Mae won’t purchase loans from lenders that don’t comply with the Statement on Subprime Lending issued by the federal government.

This protects both Fannie Mae and low-income borrowers from predatory and subprime lending practices.

Loan Size

Fannie Mae also won’t purchase “jumbo loans” that surpass the conforming loan limit, ranging from $548,250 in most of the United States to over $820,000 in more expensive locales.

Credit Scores

Typically, borrowers with FNMA-backed loans need a credit score median of 620, according to the three major credit bureaus. (Experian, Equifax, and TransUnion.)

Debt-to-Income Ratio

Debt-to-income ratios compare your before-tax income to your monthly debt payments, such as your mortgage and car payments.

Your DTI can’t exceed 43-45% for most mortgages, though some borrowers may be allowed up to 50%.

>> More: What Is Loan-to-Value Ratio?

Down Payment

For a one-unit primary residence, FNMA requires 3-5% down. However, larger down payments get better interest rates – and anything under 20% typically triggers private mortgage insurance (PMI).

Cash Reserves

FNMA also requires that consumers have at least 2-6 months of reserve payments in savings to cover monthly mortgage payments in the event of financial hardship. The exact amount may vary based on your down payment, DTI, or other factors.

>> More: Differences Between Fannie Mae and Freddie Mac

Fannie Mae Programs and Loan Options

As a mortgage investor, it’s in Fannie Mae’s best interests to ensure that more people buy mortgages they can afford.

To wit, FNMA runs a variety of loan programs to help various demographics achieve their dreams of homeownership.

HomePath

HomePath helps FNMA sell real estate owned homes (REOs) acquired by deed in lieu or full foreclosure proceedings.

These properties are sold as-is and may require some risk – but they often come at a discount to compensate. Buyers may qualify with just 3% down and receive 3% back in closing cost assistance.

HomeReady

HomeReady mortgages are designed for low- to moderate-income homebuyers looking to buy a house with a low-down payment.

Typically, you can qualify for just 3% down with a credit score above 620 and a household income under 80% of the area median income.

Mortgage Help Network

Through the Mortgage Help Network, FNMA borrowers can work with a Department of Housing and Urban Development counselor to obtain advice and options if they’re struggling to pay their monthly mortgage.

Tenant-In-Place Rental Program

If you’re a tenant in a property being foreclosed upon by Fannie Mae, you may be able to keep your lease or rent at current market prices through FNMA’s tenant-in-place program.

Loan Modifications

Since 2008, FNMA has also offered loan modification programs to help homeowners stay in their homes by modifying their interest rates, terms, or monthly payments.

RefiNow

As of June 2021, low-income homeowners can refinance their loan affordably with the RefiNow program.

Eligible homeowners must meet specific criteria, such as only missing one payment in 12 months and earning at or below 80% of the area median income.

The program confers several benefits, including monthly payment savings, reduced interest rates, and a $500 lender credit.

>> More: What Is PITI?

Fannie Mae Guidelines: Conforming and Conventional Loans

You may have heard of conforming and conventional loans. As it turns out, the definitions are easy to remember!

Conforming Loans

Loans that meet Fannie Mae and Freddie Mac’s guidelines are known as conforming mortgages.

They impose requirements on the loan size, minimum credit score and down payment, maximum debt-to-income ratio, and private mortgage insurance.

But both GSEs also allow for “compensating” factors to offset these requirements. For instance, they may overlook a higher debt-to-income ratio if the borrower posts a larger down payment.

Conventional Loans

Loans that the government doesn’t back – think the FHA, USDA, or VA – are considered conventional mortgages.

FNMA FAQs

Is FNMA the same as Fannie Mae?

Yep! “Fannie Mae” comes from the acronym FNMA.

Is Fannie Mae Owned by the Government?

FNMA was chartered by the government in 1938 and spun off to private shareholders in 1968, making it a public corporation. But since 2008, it’s been under government conservatorship.

What is the Fannie Mae Mortgage Loan Lookup Tool?

With Fannie Mae’s online lookup tool, you can determine if FNMA owns your existing loan. This comes in handy if you’re eligible for some debt or payment relief programs.

Bottom Line: What Is Fannie Mae?

Fannie Mae is a government-sponsored enterprise that plays a significant role in funding the primary and secondary mortgage markets.

While it doesn’t lend to homebuyers directly, it does ensure that banks have plenty of capital to do so.

In turn, this keeps interest rates low and supports your goal of becoming an American homeowner within reach!

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Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.