Legal Definitions - Federal National Mortgage Association

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a private company chartered by the U.S. government. Its primary function is to provide liquidity and stability to the housing market by operating a "secondary mortgage market." This means Fannie Mae buys mortgages from banks and other lenders, which allows those lenders to replenish their funds and issue more new home loans to consumers. Fannie Mae focuses on purchasing mortgages that are insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA), or are conventional mortgages.

• Example 1: Supporting Lender Liquidity
  A small community bank in Oregon has issued a significant number of FHA-insured mortgages to local families over the past year. To continue offering new loans and support its community's housing needs, the bank sells a portfolio of these existing mortgages to Fannie Mae. This transaction provides the bank with immediate cash, which it can then use to fund more new mortgages for homebuyers. This illustrates how Fannie Mae's purchases free up capital for lenders, enabling them to make more loans.

• Example 2: Expanding Homebuyer Access
  Maria and David, first-time homebuyers, are approved for a conventional mortgage from their local credit union. The credit union is confident in offering them this loan because it knows it has the option to sell the mortgage to Fannie Mae later. This ability to sell mortgages to Fannie Mae encourages lenders to provide a wider range of home loan products and maintain competitive interest rates, making homeownership more accessible to a broader population.

• Example 3: Maintaining Market Stability
  During a period of economic uncertainty, many lenders might become hesitant to issue new mortgages, fearing they could be stuck with loans they can't sell. However, because Fannie Mae consistently purchases eligible mortgages from these lenders, it helps ensure that funds remain available for new home loans. This continuous demand in the secondary market prevents a complete freeze in the housing market and helps maintain a steady flow of credit for homebuyers.