Question

Who are FNMA and GNMA? What are the differences between them and what role do they play in the mortgage market?

Answer 1

First of all before understanding the term, FNMA and GNMA, you should have to know about Mortgage Backed Securities.

These are investments that are secured by mortgages. Its a type of asset backed security.

Suppose, a bank has given a home loan, where the person who has taken the home loan will make the periodic payments and the person will live in that house till that time, i.e. a person will get the possession of the house but will not get its ownership.

Now bank will sell the loan to an investment bank. Investment bank will use the proceeds which the bank is going to receive earlier, and the investment bank will make use of that proceed to advance further loans.

Investment bank will have a number of such loans from other banks also, so the amount of instalments which the customer is paying will be quiet huge as it is not being received from a particular customers but from a number of customers. Investment bank put the proceeds in a special company designed for the said purpose and which is called as Special Purpose Vehicle(SPV).

Government is involved in these transactions. These are Fannie Mae, Freddie Mac and Ginnie Mae.

Freddie Mac and Fannie Mae are known as Government Sponsored Enterprises but they are not goverment agencies but Ginnie Mae is. Freddie Mac and Fannie Mae guarantee loan themselves.  Freddie Mac and Fannie Mae are conventional mortgage loans,
Freddie Mac and Fannie Mae are publicly-traded corporations that securitize residential mortgages and sell them to investors as mortgage-backed securities whereas Ginnie Mae comes under the Department of Housing and Urban Development. Ginnie Mae( GM ) provides the guarantee to the lenders. In other words- its a guarantor of federally backed loans.

Ginnie Mae does not participate in determining eligibility of the following cases

• Loan modifications,
• Making loans to potential homebuyers,
• Purchase loans from other lenders
• Assisting potential homebuyers with purchasing a home

And else, it only provides the guarantees not in all respects, but also only under the following cases:-

• FHA-Federal Housing Administration
• VA-Veterans Affairs
• RD-Rural Development; and
• PIH- Office of Public and Indian Housing.

Fannie Mae buys loans from larger commercial banks or public banks. Freddie Mac purchases mortgage loans from smaller banks

Since the question is not clarifying about whether its talking about Fannie Mae or Freddie Mac, so both are taught.

They both plays a vital role, in development of an economy and in ease of the process of mortgage backed security, and providing the benefits listed above.