As a result of the last U.S. economic crisis, a lot of people now know a lot more about the secondary mortgage market. Before the crisis, the secondary mortgage market was a mystery to most Americans, and it was only really important to mortgage lenders and secondary market participants and appraisers. Then all of a sudden, with the well-publicized issues surrounding the housing collapse of 2008, Fannie Mae and Freddie Mac and some of their larger clients and the big lenders became household names. Read on to learn about the history of Fannie Mae and what it means for appraisers.
Take a deep dive into Fannie Mae’s guidelines, policies, and guidance with our CE course: Fannie Mae Appraisal Guidelines: Debunking the Myths.
What is the secondary mortgage market?
The secondary mortgage market is defined in The Dictionary of Real Estate Appraisal, Sixth Edition as “a market created by government and private agencies for the purpose and sale of existing mortgages, which provides greater liquidity for mortgages. Fannie Mae, Freddie Mac, and Ginnie Mae are the principal operators in the secondary mortgage market.”
History of Fannie Mae
Fannie Mae: Then
Where did Fannie Mae come from? Fannie was created as the Federal National Mortgage Association in 1938. It was a New Deal program, and its original mission was to purchase FHA mortgages from originating lenders. Lenders were reluctant to originate 30-year mortgages back in the 1930s because they had to hold the mortgages for 30 years. Lenders didn’t want to hold them for 30 years, so Fannie Mae purchased FHA mortgages from the originating lenders so that the originating lenders then had an infusion of cash that could be loaned other borrowers. Then that mortgage would be sold to Fannie Mae, and more cash would come to the lender, and they could issue more mortgages. So, it was a revolving door type of situation.
Fannie Mae began eventually purchasing VA loans and conventional loans. Then in 1968, it was split into two entities: Fannie Mae (which we know today) and Ginnie Mae (which is the Government National Mortgage Association). One of the differences between Fannie Mae and Ginnie Mae is that Fannie Mae and Freddie Mac actually purchase mortgages and issue mortgage-backed securities; Ginnie Mae does not purchase mortgages, and they do not issue mortgage-backed securities. Ginnie Mae guarantees returns on mortgage-backed securities that are issued by approved issuers of securities that are backed by government loans, such as FHA and VA.
Fannie Mae is a private shareholder corporation. Again, it purchases mortgages and sells them to investors (mortgage-backed securities). As you may know, Fannie Mae was taken into government conservatorship along with Freddie Mac in 2008.
Fannie Mae: Now
2008 wasn’t the first time that there have been issues with Fannie Mae. They had several accounting scandals back in the late 1990s and early 2000s. As a result of the housing and credit crisis, they were insolvent; they were taken into government conservatorship, basically bailed out by the taxpayers. Fannie Mae and Freddie Mac’s long-term future is uncertain. There’s been talk about possibly replacing them or winding them down or making them government agencies. Many different plans have been floated; none have gained traction.
Fannie Mae and Freddie Mac stand behind over 50% of outstanding residential mortgages. They’re regulated by the Federal Housing Finance Agency (FHFA), which was specifically created to oversee them. Fannie Mae and Freddie Mac are often collectively referred to as the GSEs. GSE stands for government-sponsored enterprise, which is what Fannie and Freddie are.
What’s the significance of Fannie Mae for appraisers?
For appraisers, Fannie Mae and Freddie Mac create the most commonly used appraisal report forms. They issue guidelines and requirements for appraisers and appraisals, and what they issue has become the lending industry standard. Even lenders who don’t sell loans to Fannie or Freddie will often ask an appraiser to prepare an appraisal to meet Fannie Mae or Freddie Mac guidelines and requirements, and the appraiser will even use Fannie Mae/Freddie Mac forms to report the appraisals.
Another good thing for appraisers is that Fannie Mae’s Selling Guide is available for free online. You don’t have to pay a subscription or pay to download it—it’s available to download for free. Their lender announcements, which are issued when they make revisions to the Selling Guide, are widely quoted and widely disseminated. Still, there are many myths and misconceptions about Fannie Mae and the secondary mortgage market. In our CE course, Fannie Mae Appraisal Guidelines: Debunking the Myths, we walk you through the Selling Guide and tackle common misconceptions about Fannie Mae requirements and guidelines.