Reference no: EM131812576

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Matthew -

The Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, "is a secondary mortgage market for conventional loans originated by the savings associations and thrifts that are members of the Federal Home Loan Bank System." (Sirota) Originally established by the 12 Federal Home Loan Banks with an initial subscription of one hundred million dollars. Freddie Mac was placed under the supervision of three board members of the Federal Home Loan Bank Board and was allowed to raise additional funds through its own securities.

Currently Freddie Mac is an independent stock company much life that of the Federal National Mortgage Association (FNMA), or Fannie Mae.

The Federal Home Loan Mortgage Corporation buys mortgages meeting guidelines and standards, these mortgages are then packaged together and sold as securities to investors.

Freddie Mac has a similar underwriting process compared to Fannie Mae, the one notable difference is that Freddie Mac looks into the Debt - to - Income ratio without housing expenses. Freddie Mac uses an electronic underwriting system known as Loan Prospector, this program evaluates credit worthiness using statistical and judgmental rules.

Freddie Mac offers terms for home loans between 15 and 30 years, and in some cases even up to 40 year loans.
Since the 1970s Freddie Mac has been helping people purchase homes, though in 2008 Freddie Mac came under supervision Fair Housing Finance Agency and placed in conservatorship along with Fannie Mae.

Rebecca-

Fannie Mae is a government sponsored entity that was established in 1938 in order to "expand the flow of available mortgage money throughout the country" (Barrell& Sirota, 2012). In the early 1950's, they were "rechartered" to become a "national secondary market clearinghouse" and were able to sell mortgages, as well as purchase new loans (Barrell& Sirota, 2012).

Fannie Mae set their own standards for the mortgages/loans that it would accept, as they did not have to take everything that was submitted to them. "The quality and level of stability of guaranteed and insured loans were" therefore "raised in order to meet" their criteria because, the more loans that Fannie Mae will accept, the more profit the mortgage companies make in the origination and collection fees they obtain from Fannie Mae (Barrell& Sirota, 2012).

These fees created even more available funds to make even more loans. In 1968, Fannie Mae became fully privatized and "subject to federal corporate income tax and exempt from state income taxes", while still reaping the "benefit of government sponsorship" (Barrell& Sirota, 2012). This change aimed to increase their participation in the secondary market so that they could start purchasing "mortgages at a premium" and expand their "borrowing ability" (Barrell& Sirota, 2012).

Fannie Mae's underwriting standards typically include, 1) "Any loan with a loan-to-value (LTV) ratio of more than 80 percent must carry private mortgage insurance", 2) a "seller can contribute up to 3 percent of the sales price toward borrower's closing costs with a 5 percent down payment and up to 6 percent with a 10 percent down payment", 3) first-time homebuyers must receive "Homebuyer Education and counseling", 4) "a minimum down payment of 5 percent", however, "some products" "only require" 3 percent (Barrell& Sirota, 2012). Of course, there are some other qualifications not listed here, such as borrowers who have a foreclosure in their history having to wait a period of 7 years before being able to qualify for another Fannie Mae loan (Barrell& Sirota, 2012).

Overall, Fannie Mae impacts real estate finance by influencing mortgage rates and "the availability of home loans" (CBC National Bank, n.d.).

They also greatly contributed to the "financial crisis and real estate downturn" that happened in 2007/2008 due to their decreased loan standards (CBC National Bank, n.d.). The fact that they have the power to create underwriting standards has a huge impact on the industry and underwriting standards overall. Fannie Mae can also be a big part of being able to refinance mortgage loans and get a lower interest rate, as they are one of the "key players" in the real estate finance industry (CBC National Bank, n.d.).

Brandi -

Fannie Mae was established in 1938 as Federal National Mortgage Association by a congressional charter. It was created to help establish more cash flow to fund mortgages through a secondary market. A primary mortgage market would be the bank a person goes to obtain a mortgage but these institutions have limited funds for which they can loan.

In order to be able to keep lending, Fannie Mae would purchase their loans giving them the cash flow necessary to be able to continue lending. Fannie Mae would keep some of these loans themselves as investments but others they would pushed into the secondary market to be purchased by other investors.

Later Fannie Mae would go on to become a fully privatized corporation but also included "a line of credit with the U.S. Treasury, and was called a GSE"(Sirota &Barrell, 2012). They originally only purchased FHA and VA loans that met their own strict standards but later opened up to purchasing conventional loans as well.

Their underwriting standards include a %20 down payment or the purchase of PMI. Sellers are able to contribute 3-6% towards closing costs. Gross Monthly Income ratio must not be over 36 percent. After the market crash of 2008 a person who has had a foreclosure must wait a minimum of 7 years before qualifying for a mortgage or two years following a short sale. These strict requirements were put into place following the purchase of many subprime mortgages and the collapse of the market that followed.