Money Source: Bank Financing – Meet Fannie and Freddie
Most people read a book on investing or watch a late night infomercial and lose sight of the most fundamental money source available; which is a bank. Let me take this opportunity to ‘groom’ you to look good on paper from a bank’s perspective. To unlock the potential of this source one must understand the risk factors that the banks use to evaluate, in order to approve or to deny a loan. To do that, we must dive into basic underwriting principles, specifically the role that Fannie Mae and Freddie Mac play within the lending industry.
Who, not what are Fannie Mae and Freddie Mac?
These two were both taken over by the federal government when they failed years ago. They are both shareholder owned companies mandated by the United States Congress to provide funding to the housing market, and are the two largest mortgage companies in the US who provide the vast majority of mortgage credit. Both are regulated under the Federal Housing Finance Agency (FHFA).
Fannie Mae Facts:
- Fannie Mae is short for Federal National Mortgage Association (or FNMA).
- Fannie was founded in 1938 at a time when millions of families could not become homeowners, or faced losing their homes, because of a lack of mortgage funds.
- President Roosevelt’s goal was for Fannie to buy mortgages from lenders, thus freeing up capital that could go to other borrowers.
- Fannie began with just $1 billion in purchasing power back in 1938.
- It was a government agency until 1968 when it was converted into a publicly traded company owned by investors.
- Some more recent stats: Fannie Mae provided $3.7 trillion in mortgage credit from January 1st, 2009 to June 30th, 2013. This enabled 3.1 million home purchases and over 11.4 refinances of mortgages. Multifamily rental housing was also enabled through financing 1.9 million units.
Freddie Mac Facts:
- Freddie Mac is short for Federal Home Loan Mortgage Corporation.
- Freddie Mac was created by Congress in 1970 to provide competition to Fannie Mae.
- Regulated by HUD for fair lending issues.
- Some stats: Freddie has helped 1.8 million single-family purchase borrowers, 7.2 million refinancings and 1.4 million units of multi-family rental housing. Freddie Mac has also assisted 872,000 borrowers in avoiding foreclosure.
Both companies buy mortgages from approved lenders, which are the bank lenders that you seek loan approvals and funding from. These two entities guarantee or own roughly half of all of the $13 trillion United States mortgage market, and this figure has been steadily increasing as other lenders have either failed or reduced their exposure due to a falling market. Lenders look to both of them for the funds they need to meet consumers demand for home mortgages. By linking mortgage lenders with investors, the two firms keep the supply of money widely available and at a lower cost. Almost all mortgage lenders, from the biggest, like Citi, all the way down to small, local banks, they all rely on Fannie and Freddie to buy their funded loans. Otherwise these approved banks may fund loans and not be able to sell them which would mean when more loan requests come in they cannot fund the new deals, because they’re out of money to lend or their liquidity is tanked.
Fannie and Freddie give the banks guidelines that they must follow in order for them to take on the loan. By following the Fannie and Freddie guidelines the bank will get a loan from them in order to fund your deal or they may fund your deal then immediately sell off your loan to Fannie or Freddie after the deal has closed.
So, what do you do if your money or property needs don’t fit within the guidelines; will the bank still consider your loans?
A local bank can lend with their own funds, and this is typically regarded as “portfolio lending”, as the local bank will keep and service your loan in their own portfolio Instead of selling it to Fannie or Freddie. Investors are taught by some to find a portfolio lender because they will keep funding your real estate investment deals forever. But, that’s not true…banks need liquidity to continue to lend. In the past, banks would do these portfolio loans because they could still sell these on the open market to those who didn’t fit the Fannie and Freddie guidelines. Hedge funds used to buy the misfit loans, but that is not the case anymore. Lenders now rarely make portfolio loans to investors, especially new investors.
So, now you see the importance of Fannie and Freddie, and why they are the authority when it comes to underwriting guidelines and practices, and why you will likely need to meet these guidelines when you are seeking bank/conventional funding.
Any questions about Fannie and Freddie? Contact me today! For more information about funding your next investment, be sure to follow me on Facebook, Twitter, Pinterest, and Google+.