Loans, HomePath, and All You Should Know

Fannie Mae—known officially as 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. It was established in 1938 during the Great Depression as part of the New Deal. Its purpose is to help 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. 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, which is also a GSE chartered by Congress.

After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities (MBS). MBS are asset-backed securities that are secured by a mortgage or pool of mortgages. Fannie Mae’s mortgage-backed securities are then purchased by institutions, such as insurance companies, pension funds, and investment banks. It guarantees payments of principal and interest on its MBS.

Fannie Mae also has its own portfolio, commonly referred to as 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.

By investing in the mortgage market, Fannie Mae creates liquidity for lenders, which in turn allows them to underwrite or fund additional mortgages. In 2019, Fannie Mae provided $650 billion in liquidity to the mortgage market, which helped low-income Americans to buy, refinance, or rent approximately three million homes.

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 the impact it had 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 the latter half of 2008, Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Agency (FHFA). The U.S. Treasury provided $191.5 billion to keep both solvent. Both agencies have repaid the money, and then some.

In August 2012, the terms governing Fannie Mae’s dividend obligations were changed so that the U.S. Treasury claimed any profits at the end of each quarter and provides capital if there is a deficit. In September 2019, the Treasury and FHFA announced that Fannie Mae and Freddie Mac could start keeping their earnings to shore up capital reserves of $25 billion and $20 billion, respectively. The move is a step toward transitioning the two out of conservatorship.

Fannie Mae Loan Requirements

To do business with Fannie Mae, a mortgage lender must comply with the Statement on Subprime Lending issued by the federal government. The statement addresses several risks associated with subprime loans, such as low introductory rates followed by a higher variable rate; very high limits on how much an interest rate may increase; limited to no borrower income documentation; and product features that make frequent refinancing of the loan likely.

The mortgages that Fannie Mae purchases and guarantees must meet strict criteria. The limit, for example, for a conventional loan for a single-family home in 2021 is $548,250 (up from $510,400 in 2020) for most areas and $822,375 (up from $765,600 in 2020) for high-cost areas, including Hawaii and Alaska. The FHFA sets these limits.

To obtain a loan that is backed by Fannie Mae, you’ll have to go through an approved lender. Along with the avoidance of subprime loans, mentioned above, lenders must meet eligibility and underwriting criteria that ensure the credit quality of the financing.

How to Apply for a Fannie Mae-Backed Mortgage

When you have found a lender who is eligible to issue a Fannie Mae-backed loan, you will be guided in filling out a Uniform Residential Loan Application. You will need to gather and provide financial information and documentation. This includes a record of employment and your gross income and statements to back these up, such as a W-2 or 1099 form. You will also have to provide a total of your monthly debt obligations, such as balances on credit cards, car payments, alimony, and child support.

Generally, lenders prefer to follow the 28/36 Rule—that is, a household should spend no more than 28% of monthly income on housing expenses, and no more than 36% on debt servicing (including mortgages and car loans). Fannie Mae will accept a maximum debt-to-income (DTI) ratio of 36%, though this can be as high as 45% if the borrower meets credit score and reserve requirements. If your DTI ratio is too high, then you can make a larger down payment, which will reduce your 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 to be eligible 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. Of course, the better, or higher, your FICO score, the more eligible you are for the lowest available interest rates.

Loan Modifications

Following the mortgage meltdown, Fannie Mae began to focus on loan modifications. Loan modifications change the conditions of an existing mortgage to help borrowers avoid defaulting, ending up in foreclosure, and ultimately losing their home. Modifications can include a lower interest rate and extending the term of the loan, which would lower monthly payments. Since September 2008, Fannie Mae and Freddie Mac have completed more than 2.37 million loan modifications.

Fannie Mae HomePath

When foreclosures arise on mortgages in which Fannie Mae is the owner/investor, or when properties are acquired through deeds in lieu of foreclosure or forfeiture, Fannie Mae attempts to sell the properties in a timely manner to minimize potential impacts on the community. HomePath.com is the Fannie Mae website where home buyers and investors can search for and make offers on these properties, and HomeReady by Fannie Mae offers buyer financing products for the properties.

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 exclusively offers properties that are owned by Fannie Mae and include single-family homes, townhouses, and condominiums. Fannie Mae uses local real estate professionals to prepare, maintain, and list the properties for sale. Most listings have photographs, property descriptions, and other details, including school and neighborhood information.

Fannie Mae and COVID-19

Due to the financial impact of the ongoing coronavirus pandemic, countless homeowners found themselves in situations where they were unable to afford their mortgage payments. To help in this situation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2020, required that lenders holding federally backed mortgages grant their pandemic-affected clients forbearance for up to 180 days and hold off on foreclosure-related evictions.

As part of this, Fannie Mae offered the following mortgage assistance and relief options for borrowers of its single-family mortgages who have been financially impacted by the current national emergency:

• Ability to request mortgage assistance by contacting a mortgage servicer
• Suspension of foreclosure sales and evictions until June 30, 2021
• Eligibility for a forbearance plan to reduce or suspend mortgage payments for up to 12 months
• Suspension of credit bureau reporting of past-due payments of borrowers in a forbearance plan as a result of hardships attributable to the ongoing pandemic
• No incursion of late fees for borrowers in a forbearance plan
• A requirement that after forbearance, a servicer will work with borrowers on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification

In addition, the FHFA also put in place more flexible lending and appraisal standards for loans backed by Fannie Mae and Freddie Mac to make sure that homebuyers could close on loans during the pandemic and that all parties involved can maintain social distancing throughout the process. These standards now allow:

• Alternative appraisals on purchase and refinance loans (conducting drive-by and online appraisals versus on-site)
• Alternative methods for documenting income and verifying employment before loan closing (for example, employment verification via email)
• Expanding the use of power of attorney to assist with loan closings (for example, e-signatures)

The flexibilities regarding documenting income and power of attorney are being allowed to expire April 30, 2021, but the alternative appraisals flexibility has been extended to at least May 31, 2021.

While some of the initial protections under the CARES Act have expired, President Joe Biden has extended a foreclosure moratorium for federally guaranteed mortgages through June 30, 2021.

Fannie Mae’s RefiNow Program

Starting June 5, 2021, Fannie Mae will offer low-income mortgage holders a new refinance option through a program called RefiNow, meant to reduce their monthly payments and interest rates. To be eligible, homeowners must be earning at or below 80% of their area median income (AMI).

This program is intended to help more homeowners refinance by removing some of the barriers of the traditional refinancing process, improving affordability, and promoting sustainable homeownership. “Lower-income borrowers typically refinance at a slower pace than higher-income borrowers, potentially missing an opportunity to save on housing costs,” said Malloy Evans, Senior Vice President and Single-Family Chief Credit Risk Officer, 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 offers several benefits for homeowners. First, it requires a reduction in the homeowner’s interest rate by a minimum of 50 basis points and a savings of at least $50 in the homeowner’s monthly mortgage payment. Second, Fannie Mae will provide 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. Finally, the program waives the 50-basis-point up-front adverse market refinance fee that Fannie Mae otherwise charges to lenders on balances at or below $300,000.

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

• Be in possession of a Fannie Mae-backed mortgage secured by a one-unit principal residence.
• Have a current income at or below 80% of the AMI (not the income as of origination of the original loan).
• Never missed a mortgage payment in the past six months and no more than one missed mortgage payment in the past 12 months.
• Be in possession of a mortgage with a loan-to-value ratio up to 97%, a debt-to-income ratio of 65% or less, and a minimum 620 FICO score.