There’s little doubt that the government plays a vital role in the mortgage business. Originators rely on government loans and government-sponsored enterprises (GSEs) to deliver a wide variety of products to a broad spectrum of borrowers.
The mortgage market gains a sense of confidence with loans through the GSEs or those backed by government agencies. Without these programs, mortgage companies would certainly serve far fewer borrowers. Those who work in the industry need a solid grounding in how these programs work, as well as their background and history. Understanding each will help originators better do their jobs.
The GSEs — Freddie Mac and Fannie Mae — don’t actually lend money directly to borrowers. Instead, they buy qualifying loans from mortgage companies and banks, then sell them to investors on the secondary market. This frees up cash for lenders to put back into the market.
Fannie Mae, or the Federal National Mortgage Association, was originally founded in 1938 in part as a way to boost middle- and working-class homeownership rates. It’s been wildly successful, using the power of the federal government to put people in homes. Fannie Mae grew so large that, in 1968, the government converted it to a publicly traded company.
At the same time, the government split off Ginnie Mae, or the Government National Mortgage Association, a wholly owned government corporation. Ginnie Mae is an arm of the U.S. Department of Housing and Urban Development, or HUD. Ginnie created the first mortgage-backed securities in 1970 and have backed them ever since. The Ginnie Mae guarantee is what lets mortgage lenders get better prices on their mortgages through capital markets.
Freddie Mac, or the Federal Home Loan Mortgage Corporation, was chartered in 1970, mainly to keep Fannie Mae from acting as a monopoly. It went public in 1989. Similar to Fannie Mae, its mission is to provide liquidity, stability and affordability to the U.S. housing market.
As part of housing-market reforms, Freddie Mac and Fannie Mae each were put into conservatorship in 2008 and bailed out for $187.4 billion, keeping them afloat and keeping thousands of homeowners from losing their homes. Since then, both have been overseen by the Federal Housing Finance Agency.
Government loans come in all shapes and sizes. The three most popular loan products are ones offered through the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).
FHA loans have a number of built-in advantages. They often start with lower rates and require a much lower barrier to entry than a conventional loan. A homeowner can land an FHA loan for as little as 3.5 percent down, making it perfect for first-time homebuyers and lower-income buyers. Since these loans are guaranteed by the FHA, they are extremely attractive when packaged into mortgage-backed securities to sell.
FHA loans also have relaxed guidelines to allow more borrowers to buy a home. Compared to conforming loans through the GSEs, FHA loans generally have shorter waiting periods for prior derogatory credit problems, including bankruptcies, foreclosures, and short sales, along with a much lower credit requirement to qualify.
This makes FHA loans attractive for younger buyers, such as millennials and members of Generation Z. For lenders and originators, these can be the perfect clients to get into their first home, as their loyalty can help them be remarketed to and retained through multiple refinances and home purchases.
VA and USDA
There is a similar appeal to the VA loan. These loans are guaranteed by the Veterans Administration and are one of the best perks of serving in the military. Unfortunately, a lot of lenders don’t bother to get VA delegation, so they have to work with other companies that do. Mortgage companies that offer VA loans can do so quickly, and without all of the headaches and hassles that many borrowers deal with.
In fact, VA delegation makes your life easier in a variety of ways. The VA market is relatively underserved, with a lot of banks offering other products like FHA and conventional loans that they know they can close, instead of doing the work and getting veterans the loan that they earned.
VA loans offer low interest rates, often don’t require a downpayment and allow veterans to avoid private mortgage insurance. It’s the obvious choice for veterans and their families. Those who qualify with certain terms of service include active-duty personnel; members of the National Guard and reserves; surviving spouses of veterans; cadets at the U.S. Military, Air Force and Coast Guard academies; midshipmen at the U.S. Naval Academy; and commissioned officers of the Public Health Service, Environmental Science Services Administration or National Oceanic and Atmospheric Administration.
USDA loans are a different animal. They are designed to get people in rural areas into homes and to encourage development further out from cities. These loans require no downpayment, making them attractive for many rural or suburban buyers.
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Government and conforming loans come in a variety of flavors from many different places, but are well worth the effort to develop programs and offer them to your borrowers. Originators who don’t will get left behind by not offering the full complement of options that today’s sophisticated buyer wants.