- The Washington Times - Friday, September 14, 2001

Mortgage rates change. People can find affordable housing. The market is stable. Wall Street, despite recent setbacks, is holding its own.

Many believe it's thanks to the Federal Home Mortgage Corp. and the Federal National Mortgage Association. You know them better as Freddie Mac and Fannie Mae.

Freddie Mac and Fannie Mae are separate companies that play an important role in the financial stability of the American economy.

Freddie Mac and Fannie Mae have similar charters, but the two companies differ in their business strategies. Competition between them ensures that the benefits of the secondary housing market are passed on to home buyers in the form of lower housing costs. Both companies operate as traded corporations.

When established in 1938, Fannie Mae was part of the Federal Housing Administration and was authorized only to buy FHA-insured home loans to replenish the lenders' supply of money.

In the 1960s, Fannie Mae became a private company with private capital, capable of sustaining itself. It expanded its role to buy mortgages outside the government loan limits.

Freddie Mac operates much the same way. Congress established its charter in 1970, setting a clear mission to stabilize the nation's mortgage markets and expand opportunities for homeownership and affordable rental housing.

Although these companies are chartered by Congress, they pose no financial risk to taxpayers. Freddie Mac has more than $862 billion in its financial portfolio and several billion in capital reserves. Fannie Mae holds more than 12 million mortgages and is one of the largest financial-services companies in the world.

The companies' obligations do not constitute government debt and are not guaranteed by the government.

Actually, Fannie Mae and Freddie Mac are among America's largest taxpayers; Freddie Mac has paid more than $1 billion in taxes over the past three years.

Now, the companies fulfill their mission by purchasing certain, qualified home mortgages from lenders, allowing mortgage brokers to "restock" with cash, which in turn can be lent to potential homeowners.

These companies then pool those loans together and sell shares in the form of

mortgage-backed securities. Neither company offers loans itself.

"We could easily do more than $30 million worth of mortgages in a month, and at that rate, the money is going to run out pretty quickly," says Kelly May, a loan officer with Wells Fargo Home Mortgage Inc. in Fairfax. "But these companies allow us to replenish the money we have out there to lend. It's a win-win deal for everyone."

Mr. May, who has been a loan officer for more than 10 years, says his firm sells qualified mortgages to Fannie Mae and Freddie Mac loans.

"This replenishes our funds we can in turn loan out to you," he says. "Fannie Mae and Freddie Mac set the standards for the mortgage industry — they make our market 'liquid.'"

Loans that are eligible for Freddie Mac and Fannie Mae purchase must meet certain criteria — the borrower must be willing and able to repay the mortgage, and the property must be valuable enough to help pay off the mortgage if the borrower defaults on payments.

"And we have these guidelines in mind when we're making a loan," Mr. May says. "It's in our best interest to abide by those guidelines."

Mr. May says it's important to remember that other companies with less stringent requirements than Freddie Mac or Fannie Mae also underwrite loans.

"So, if you don't meet those company's guidelines, there are other loans we can look for," he says, "but people who meet the Fannie Mae and Freddie Mac guidelines get the best mortgage rates."

Credit rating and financial stability are two of the main qualifications Freddie Mac and Fannie Mae look for when searching for mortgages to buy.

The companies are looking for mortgages that are sound investments — low-risk mortgages.

If your mortgage is purchased, though, you may not necessarily know it.

"It's not necessary information for a homeowner to know," says Rachel Burton, a public-relations specialist with Fannie Mae. "If you ask your lender, they will tell you if your loan has been purchased, but it's really nothing to be concerned about."

Fannie Mae and Freddie Mac buy mortgages, but homeowners do not pay the agencies directly. A homeowner will still write out his mortgage check to his mortgage company. The mortgage company then pays Fannie Mae or Freddie Mac, less a service fee.

According to the Office of Management and Budget, mortgage rates are 50 basis points lower because of Fannie Mae and Freddie Mac's existence.

The secondary market has ensured that funds are available continually for residential mortgages. That market financed more than $256 billion in new mortgages in 1999.

The report also states that because homeowners save on their mortgages, borrowers collectively have saved more than $15 billion a year.

"There are no negatives in the relationship between these companies and a mortgage company," Mr. May says. "These companies have a huge stake in the economy and have made this real estate market accessible everyone."

Lenders believe it is because of Fannie Mae and Freddie Mac that America has a stable and accessible real estate market.

"There isn't another country in the world that can touch our market," Mr. May says. "The mortgage market is untouchable by any other nation. These companies have made it strong."

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