Both Fannie Mae and Freddie Mac business organizations are government-sponsored mortgage corporations based in the United States of America. They are associated with secondary mortgages in the conversion of mortgage loans into securities that allow customers (lenders) to seek loans using these mortgage-backed securities (MBS) as collateral. The strategy adopted by the two players in the secondary mortgage market has helped them realize huge revenues as more lenders are willing to convert their mortgage loans into mortgage-backed securities that can be used in the acquisition of borrowings from financial institutions, money that can be used in the acquisition of new homes. Comprehensive analyses of both Fannie Mae and Freddie Mac secondary mortgage market players is necessary for illustrating the strategies involved in securing business deals with them, the best practices and political obstacles both the customers and the business organizations face when securing business contracts, and developing insight into various approaches that customers can employ in securing contracts with the two organizations.
Strategies involved in Securing Secondary Mortgage Business Contracts
Fannie Mae provides services that enable low-income citizens to own homes through the mortgage-backed collateral services offered by the company. Fannie Mae purchases mortgage in the secondary mortgage market, which it converts into mortgage-backed collateral that can be used by new potential homeowners in purchasing homes (Federal Housing Finance Agency par. 1). The business engagement between the organization and a potential homeowner entails the mortgage lender complying with the federal government’s Statement on Subprime Lending (Connett par. 2). This statement ensures that the mortgage lender agrees with the risks of subprime borrowings, such as reduced introductory rates accompanied by increased variable rates, among other risks (Connett par. 3). The business contract between the mortgages lender and the organization is sealed on acceptance of the Subprime Lending Statement.
On the other hand, Freddie Mac facilitates the acquisition of mortgages by lending institutions. Through Freddie Mac, banks and other money lending institutions acquire mortgages running for up to 30 years (Amadeo par. 1). In securing business contracts with mortgage lenders, this organization buys mortgages from the lenders, including financial institutions. The purchased mortgages are converted into mortgage-backed securities that are sold to pension and mutual funds, as well as insurance firms, among other customers (Government Accountability Office 3). The organization issues monthly agreed-upon funds to its investors (Amadeo par. 5). Financial institutions can then sell the mortgages to their customers over a similarly long period of time.
Best Practices Associated with Secondary Mortgages Market
There are several approaches that both the buyers and sellers of secondary mortgages can embrace in ensuring a smooth transition in their business dealings. Both Fannie Mae and Freddie Mac secondary mortgage corporations need to adopt the best practices in aiming at fair business deals with the mortgage lenders. First, the introduction of the Subprime Lending Statement by the federal government ensures that both the mortgage lenders and the two corporations are in mutual agreement with the mortgage lenders (Connett par. 4). The terms in the statement, such as the expected low mortgage introductory rates, ensure that both contracting parties have the needed background information concerning the impending deal. Secondly, the U.S.’ Government Accountability Office argues that both Fannie Mae and Freddie Mac are responsible for charging fair mortgages and that the mortgage prices should not be hiked (5). The organizations should also keep a timely delivery of agreed-upon revenues to the mortgage lenders on the agreed duration basis (Phillips par. 1). This is essential in ensuring that an excellent working and business relationship is maintained between the business enterprises and the mortgage lenders.
Lastly, both Fannie Mae and Freddie Mac are responsible for ensuring fairness in terms of competition in the market for secondary mortgages. The two organizations have the role of ensuring that their activities in terms of services promotion does not infringe on other secondary mortgage sellers’ freedom and rights (Phillips par. 2). Also, the organizations’ expected returns on investments (ROI) should be relatively fair concerning the agreed mortgage rates (Phillips par. 4). The fairness, affordability, and respect for sellers’ rights and freedoms thus impact positively on the organizations’ capacity to remain competitive in the markets.
Political Obstacles in the Secondary Mortgages Market
Although both Fannie Mae and Freddie Mac are owned by the United States of America’s federal government, they face political hindrances, just like any other business organization. For instance, Than reports that both private corporations are not guaranteed by the federal government (par. 1). Therefore, if they become insolvent, bankrupt or fall into financial crises, the federal government does not promise to bail them out (Than par. 2). Another political obstacle facing both secondary mortgage market players is that they are legally bound to regularly service the resold mortgage(s) on the agreed-upon period, whether the corporation has resold the mortgage-backed securities or not (Than par. 1). Therefore, the mortgages lender has the right to sue the secondary mortgages dealers if they have failed to carry out the secondary mortgages’ regular servicing. The mortgage lenders, on the other hand, encounter political obstacles in securing the business contracts with the private corporations. All mortgage lenders must comply with the provisions of the Subprime Lending Statement issued by the federal government (Edwards par. 1). For the contract to materialize, the mortgages lenders must accept the reduced mortgage introductory rates, and the slowly increasing variable rates, among other threats associated with the Subprime Lending Document (Edwards par. 4). This implies that the challenges faced by mortgages lenders in complying with the Subprime Lending Statement could be compounded in their responses to Fannie Mae and Freddie Mac’s challenges in servicing resold mortgages.
The requirement for Fannie Mae and Freddie Mac subscribers to meet the stated balloon payments could also be another challenge. Balloon payments are recognized by the federal government and are up-front payments by the secondary mortgage borrowers to the lenders, and such payments are generally substantial (Edwards par. 6). Since lenders charge the borrowers of secondary mortgages hefty balloon payments, most borrowers are likely to be scared of entering into the secondary mortgages contracts.
Approaches to be used in securing Contracts with both Fannie Mae and Freddie Mac
Freddie Mac and Fannie Mae have both proven vital for new homeowners as they enable them (new homeowners) to get the needed housing mortgages using mortgage-based securities. However, securing a business deal with these private secondary mortgages dealers requires that the mortgages borrowers comply with several secondary mortgage borrowing guidelines, such as the Subprime Lending Statement issued by the United States of America (Connett par. 6). Several approaches exist that borrowers can use in securing business associations and contracts with both Fannie Mae and Freddie Mac corporations. First, the borrowers or new homeowners can investigate the expected returns on investments (ROI) by the secondary mortgages dealers and choose the dealers offering the most affordable deals (Chaves par. 5). The ROI is the revenue that private corporations expect to realize after selling the secondary mortgages to new homeowners (Connett par. 3). Notably, this is important in ensuring that the new homeowners do not choose secondary mortgages to lead them into financial crises.
Secondly, the provisions of the Subprime Lending Statement issued by the United States of America federal government is essential in dictating which secondary mortgage dealers the new homeowners should approach for business contracts. Only dealers whose Subprime Lending Statement provisions are very suitable to the potential new homeowners’ demands should be selected for contracts (Connett par. 4). Lastly, before securing a secondary mortgages deal with the two private secondary mortgages market players, the mortgages lenders should assess the expected revenues from the regular servicing of the secondary mortgages by the two private corporations (Chaves par. 2). Only the private corporation offering the best servicing of the secondary mortgages should be selected for secondary mortgages business contracts.
Both Fannie Mae and Freddie Mac are state-owned. They are associated with the purchases, borrowing, and letting of secondary mortgages. The organizations convert the mortgages into mortgage-based securities that they sell to prospective homeowners, pension funds, and insurance companies, among other parties. This business has enabled both companies to improve their productivity in the recent past. An analysis of both Fannie Mae and Freddie Mac helps to understand the challenges faced by the two organizations, such as lack of government guarantee and compulsory servicing of resold loans, as well as recommends strategies that customers can use to establish business relationships with either organization.
Amadeo, Kimberly. “Why Your Bank Sells Your Mortgage, and How That Helps You.” The Balance, 16 May 2020, www.thebalance.com/secondary-mortgage-market-3305960/. Accessed 10 July 2020.
Chaves, Tricia. “What Is a Secondary Mortgage?” Home Guides | SF Gate, 7 October 2016, www.homeguides.sfgate.com/secondary-mortgage-7690.html/. Accessed 10 July 2020.
Connett, Wendy. “What Does Fannie Mae Do?” Investopedia, 18 March 2020, https://www.investopedia.com/articles/investing/091814/fannie-mae-what-it-does-and-how-it-operates.asp/. Accessed 10 July 2020
Edwards, Ciele. “Problems with Second Mortgages.” Home Guides | SF Gate, 21 November 2017, www.homeguides.sfgate.com/problems-second-mortgages-2232.html/. Accessed 10 July 2020.
Federal Housing Finance Agency. “Fannie Mae and Freddie Mac.” https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac/Pages/About-Fannie-Mae—Freddie-Mac.aspx. Accessed 10 July 2020
Merrill, Than. “Problems Facing the Secondary Mortgage Finance Market.” Fortune Builders, 9 August 2018, www.fortunebuilders.com/problems-facing-secondary-mortgage-finance-market-30958/. Accessed 10 July 2020.
Phillips, Gregory Erich. “Everything You Need to Know About the Secondary Mortgage Market.” SmartAsset, 26 April 2019, www.smartasset.com/mortgage/everything-you-need-to-know-about-the-secondary-mortgage-market/. Accesses 10 July 2020.
U.S. Government Accountability Office. Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-term Structures. Report to Congressional Committees, Sept 2009. https://www.gao.gov/new.items/d09782.pdf. Accessed 10 July 2020.