April 9, 2017
Orion’s AEs, and our brokers, should be well versed in the “Agencies.” Both Fannie Mae and Freddie Mac are currently owned by the United States government (under “conservatorship”) and regulated by the Federal Housing Finance Agency. When you hear or read about "conforming" or "conventional" mortgages, know the reference is to Fannie and Freddie mortgages.
When a conventional mortgage funds, Orion will usually bundle it with of millions of dollars of other mortgages and sell the pool to Fannie Mae or Freddie Mac, or to an aggregator who does that. Freddie and Fannie will then create a bigger bundle, think hundred million, and sell Mortgage Backed Securities (MBS) to investors. Thus, home loan in El Centro, CA, becomes an investment for the Shreveport Municipal Employees Pension Fund. Or an insurance company in Tokyo.
These investors purchase MBS as an alternative to U.S. Treasury bonds or other long term fixed rate investments. When investors are buying MBS, it drives prices up, and rates go down. When they are selling, or not buying, rates tend to go up.
Mortgages in Fannie or Freddie securities are underwritten to either Fannie Mae or Freddie Mac underwriting guidelines. When investors purchase the MBS of conventional mortgages they do so with the understanding that all the mortgages in their investment have been underwritten and funded under these guidelines.
The differences between Fannie and Freddie comes down to their underwriting guidelines. For decades Freddie was known for somewhat looser underwriting standards, in the past few years Fannie has altered several of its guidelines to align with the Freddie guidelines.
The differences between the two are few but useful to know when certain situations arise. For instance, Orion’s brokers know that for income qualifying, Freddie may only require one-year tax returns in situations where Fannie may require two years. Certain property requirements are sometime easier for loans going to Freddie as well. Certain instances of how credit and debt are considered, use of co-signers and funds can also vary between the Fannie and Freddie guidelines.