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Personal Finances / Buying or Selling a Home
|Subject: Re: FYI: When Rules Collide||Date: 7/13/2013 8:00 PM|
|Author: CCinOC||Number: 125771 of 127901|
Here's a good explanation of what "backed" means.
Fannie Mae buys loans from approved mortgage sellers, either for cash or in exchange for a mortgage-backed security that comprises those loans and that, for a fee, carries Fannie Mae's guarantee of timely payment of interest and principal. The mortgage seller may hold that security or sell it. Fannie Mae may also securitize mortgages from its own loan portfolio and sell the resultant mortgage-backed security to investors in the secondary mortgage market, again with a guarantee that the stated principal and interest payments will be timely passed through to the investor. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.
In order for Fannie Mae to provide its guarantee ["backed"] to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Mortgages that don't meet the guidelines are called "nonconforming". Fannie Mae produced an automated underwriting system (AUS) tool called Desktop Underwriter (DU) which lenders can use to automatically determine if a loan is conforming; Fannie Mae followed this program up in 2004 with Custom DU, which allows lenders to set custom underwriting rules to handle nonconforming loans as well. The secondary market for nonconforming loans includes jumbo loans, which are mortgages larger than the maximum mortgage that Fannie Mae and Freddie Mac will purchase. In early 2008, the decision was made to allow TBA (to-be-announced)-eligible mortgage-backed securities to include up to 10% "jumbo" mortgages.
In other words, the Agencies (Fannie Mae/Freddie Mac) don't have huge stockpiles of money that it lends to consumers through the go-between of the nation's lenders.
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