Fannie and Freddie sounds like a brand of chocolates from the 1920s, or perhaps the names of your elderly grandparents you visit twice a year in upstate New York. Alas, neither is the case. So I bet you're wondering- "Who are Fannie and Freddie and why are they in my mortgage?"
Fannie Mae and Freddie Mac were actually created by Congress with the goal in mind of becoming an affordable and reliable source of mortgage funding for all Americans. The organizations provide funds to the financial institutions that shell out the cash you need to buy the home you want to buy- when you want to buy it.
It's a great plan, but things haven't always been that simple for our friends Fannie and Freddie. Learning a bit about these organizations will help you understand the home buying industry as it is today.
How do the organizations work?
Fannie Mae and Freddie Mac’s systems funnel money to mortgage lenders to encourage American home ownership. The companies purchase loans from lenders to replenish their funding, allowing more mortgage loans to be distributed to more borrowers. So, although they don't directly deal with homebuyers, they are an extremely important part of the lending process.
Both of the organizations were successful from their inception, and continued to thrive throughout the late 1990s. While some of us were eating purple ketchup and trying to keep our Tamagotchis alive, our parents were getting mortgages from Fannie Mae and Freddie Mac. The market was good, and most Americans had dependable access to a home financing system that could sustain itself.
What led the government to take over?
Over time, the liquidity of these institutions began to diminish, and it became more and more difficult for Fannie Mae and Freddie Mac to lend money. The decline of their assets became the center of the housing crisis of 2008 as many Americans struggled to make their mortgage payments on time.
In September of that year, Fannie Mae and Freddie Mac were placed into conservatorship, which basically means that the government began to control the organizations and their assets.
How has the housing market changed?
The Federal Housing Agency still regulates Fannie Mae and Freddie Mac to this day, and has been a crucial element of the housing market's recovery. In fact, the housing market would have collapsed again in 2011 without the FHA, which would have sent the industry into a double dip recession. The good news is that the market has been making a steady increase over the last few years, and the National Association of Realtors predicts home sales will continue to rise modestly in 2016.
How does this impact you?
The typical American homebuyer had a median household income of $86K during 2015, according to the National Association of Realtors. In contrast, the same association reported that the median income of homebuyers dropped as low $66K in 2002. This speaks to the fact that it has become increasingly difficult for the middle class to afford to buy a home, which may impact you depending on your income level.
Although it can be difficult, buying a home is an attainable goal with the help of your old friends Fannie and Freddie. If you’re in the market, we have flexible terms, knowledgeable professionals, and a first-time home buyers program to get you started. You can check out your options here.
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