Fannie Mae is a government-sponsored entity that was established by Congress in 1938. The main purpose of Fannie Mae is to make the mortgage financing process more affordable for borrowers who earn a low or moderate-sized income.
The way in which Fannie Mae works is that the entity itself will purchase a mortgage from a standard mortgage lender, such as a bank or a company like LoanDepot. After Fannie Mae purchases a mortgage loan from one of these lending institutions, the entity will then turn around and sell it to an investor as a mortgage-backed security. This ongoing cycle helps to stabilize prices in the housing market, making it more affordable for borrowers to buy a home.
In addition to homeowners, Fannie Mae provides services for renters, persons whose properties are in foreclosure, individuals whose properties are damaged by natural disasters, and those who reside or invest in single-family and multifamily homes.
Similar to its mission during the Great Depression, Fannie Mae has also recently had to make some changes to its services in order to help those who have suffered financial hardship due to COVID-19. Some options that Fannie Mae has to offer homeowners and renters who are struggling to keep pace with their mortgage or rent payments include the following:
- Temporary forbearance or COVID-19 payment deferral on a mortgage;
- Reduced mortgage rates;
- Modified mortgage repayment plans;
- Shared equity programs;
- Traditional or cash-out refinance;
- Reinstatement of a mortgage loan;
- State and local rental assistance (note that this option will depend on where a renter lives); and
- Various other loan tools that may be available to homeowners and renters who require financial assistance as a result of COVID-19.
As may be evident from the above information, Fannie Mae has a wide variety of options it can offer to both mortgage borrowers and renters who are in need of a loan or some other kind of property-related financial assistance. COVID-19 has only served to encourage Fannie Mae to broaden an already extensive array of mortgage relief options. Many of which can be confusing to first-time homeowners and renters.
Therefore, if you need help in determining which Fannie Mae recovery program would be the right fit for you, then it may be in your best interest to contact a local real estate lawyer for further legal guidance. A lawyer can discuss each of your options and can provide expert legal advice on why some relief programs may be a better choice based on your financial circumstances.
What are Freddie Mac Loans?
Similar to Fannie Mae, Freddie Mac is also a government-sponsored entity, but it was not established by Congress until 1970. The reason Congress created Freddie Mac was to promote competition with Fannie Mae.
In other words, Freddie Mac was set up to reduce the fees that Fannie Mae was charging and as a tool to decrease the overall cost of a mortgage. Again, this cycle helps to regulate prices in the housing market and to keep the average price of homes low.
Like Fannie Mae, Freddie Mac also had to make some changes to its business model as a result of COVID-19. For example, renters who cannot afford to make rent payments due to COVID-19 issues may be eligible to apply for Freddie Mac’s emergency rental assistance program. In some states, a renter may be able to apply for a forbearance on their rent payments or may be covered by a moratorium on evictions mandate in their state.
In addition, Freddie Mac also offers a broad range of relief programs and financial assistance options to homeowners. Some examples of such options include the following:
- Short sales;
- Deeds in lieu;
- Enhanced relief finance mortgage;
- Modified mortgage repayment plan or deferral; and
- A number of options for homeowners directly impacted by COVID-19.
Lastly, just like Fannie Mae, Freddie Mac provides financial support to single-family and multifamily lenders, other servicers, and its suppliers.
What is the Difference Between Fannie Mae and Freddie Mac Loans?
The main difference between a Fannie Mae loan and a Freddie Mac loan concerns the type of entity that they purchase mortgages from. For instance, Fannie Mae tends to purchase mortgages from larger or commercial lending institutions like major banks.
On the other hand, Freddie Mac typically purchases mortgages from smaller lending companies and banks. Briefly, these smaller banks are sometimes referred to as “thrift banks” or “Savings and Loan Associations.”
Some other minor differences between the two loan programs include the following:
- Fannie Mae preceded Freddie Mac, meaning they were founded in different years.
- Fannie Mae was originally established so that banks could issue additional mortgages, whereas Freddie Mac was created to resell loan relief packages on the aftermarket.
- The designated acronym for Fannie Mae is “FNMA”, while the one for Freddie Mac is “FHLMC”.
- Their headquarters are set in two separate states.
- Fannie Mae offers the HomeReady mortgage loan, and Freddie Mac provides the Home Possible mortgage loan.
Regardless of their differences, both entities played a major role in the U.S. Mortgage Crisis of 2008.
How Does One Obtain a Fannie Mae or Freddie Mac Loan?
Contrary to popular belief, a borrower does not obtain a mortgage loan from Fannie Mae or Freddie Mac. Instead, the borrower must apply for a mortgage loan with a lending institution or mortgage company that is considered a Fannie Mae or Freddie Mac-approved lending service.
In most cases, large commercial banks or well-known mortgage providers will be included on the list of approved lending companies for Fannie Mae. Borrowers can confirm that a mortgage lender is listed by visiting the website for Fannie Mae and navigating to the relevant section. Once this is confirmed, the borrower can begin the loan application process with that lender.
Some basic financial traits that are shared by borrowers who obtain mortgages from Fannie Mae-approved lenders include:
- Requesting a loan for no greater than roughly $550,000 or less;
- Maintaining a credit score of 620 or higher;
- Having a debt-income ratio of no more than 45% (with some exceptions);
- Demonstrating they can hold a steady job or income for at least two consecutive years;
- Making a down payment of 3% to purchase a single-family home or 20% if it is an investment property; and
- Several other important requirements that can be found on their respective websites.
Many of the above conditions will also apply when taking out a mortgage that is backed by Freddie Mac-approved lending companies or thrift banks. However, there are some different requirements for certain Freddie Mac programs, such as the Home Affordable Modification Program (HAMP). Thus, it is best to retain legal counsel when one is considering and applying for financial relief under any of these programs.
What are The Pros and Cons of Fannie Mae or Freddie Mac Loans?
Some pros of applying for Fannie Mae and/or Freddie Mac loan programs include that they:
- Allow borrowers with low or moderate income to purchase property that they otherwise could not afford;
- Increase the chances that a mortgage is not the result of predatory lending practices or a risky subprime mortgage scheme;
- Permit borrowers to purchase second homes, vacation rentals, and investment properties;
- Allow borrowers to skip paying for insurance premiums on a mortgage if they pay at least 20% as a down payment on a mortgaged property; and
- Offer lots of different recovery options to meet a borrower’s specific needs.
On the other hand, some cons of applying for Fannie Mae and/or Freddie Mac loan programs include that:
- Borrowers will have to meet a higher credit score threshold than they may need to for other government-sponsored loans;
- Borrowers cannot earn more income than the average income prescribed by the program;
- Borrowers who declare bankruptcy or have their property foreclosed on by a lender will have to wait for a longer period to pass before they can obtain a standard mortgage; and
- Borrowers who pay less than 20% for a down payment or have a low credit score must pay a higher premium on their private mortgage insurance.
Are There Any Legal Issues Associated with These Types of Loans?
As discussed in an above section, Fannie Mae and Freddie Mac loans contributed to the Housing Crisis of 2008 in the United States. Eventually, the situation worsened to the extent that the U.S. Department of the Treasury had to bailout Fannie Mae and Freddie Mac.
Although both Fannie Mae and Freddie Mac have since repaid the government for the bailout, it did not occur before the crisis wreaked havoc on the U.S. housing market and cost taxpayers billions of dollars.
It also led to both entities’ removal from the New York Stock Exchange (NYSE). Thus, Fannie Mae and Freddie Mac are now essentially owned by the federal government.
Some other legal issues that have been associated with these types of loans include:
- Subprime mortgage issues;
- Fraud and COVID-19 fraud prevention issues;
- Mortgage defaults and missed payments;
- Interest accrual that can lead to penalties; and
- Other related debts that may force a borrower to file for bankruptcy.
How Has COVID-19 Affected the Application Process for Fannie Mae and Freddie Mac Loans?
As previously mentioned, the application process for both Fannie Mae and Freddie Mac has expanded to include more options that address a borrower’s financial circumstances in light of COVID-19. Some examples include:
- Implementing a new program called the COVID-19 payment deferral program;
- Extending foreclosure moratoriums and the length of temporary forbearance;
- Creating the COVID-19 Advanced Loan Modification policies;
- Adopting the “Final Rule”, which provides protections for borrowers;
- Extending deadlines and requiring requests from borrowers before a lender can assert that a reverse mortgage is due; and
- Removing the fees on all mortgage refinances.
Do I Need to Hire a Real Estate Lawyer for Help?
In general, issues that are affected by real estate laws can become overly complicated due to complex regulations and the types of legal procedures that must be complied with to solve them. Therefore, if you are dealing with issues that involve Fannie Mae and Freddie Mac loans or similar mortgage problems, then it is strongly recommended that you hire a local real estate lawyer immediately for further legal advice on the matter.
An experienced real estate lawyer will be able to discuss the differences between Fannie Mae and Freddie Mac loans, as well as the discrepancies between the recovery options within each of their respective programs. Your lawyer can assist you in navigating the application process for the corresponding program from which you are seeking relief.
Your lawyer can also help you to complete and submit any necessary legal documents, such as the loan application itself. In addition, your lawyer will be able to provide legal representation in court if a dispute arises over the terms of your mortgage loan or at any other type of legal proceeding that is related to your real estate issue.
Finally, you should absolutely consider consulting a local real estate lawyer about such matters; especially, if your financial hardship is directly related to the economic effects of COVID-19. Your lawyer will be able to keep you abreast of any changes in the law and can apprise you of the various rights and benefits you may have under a COVID-19 assistance recovery program.