Fannie Mae is a private company with government ties that has traditionally purchased most of the mortgage loans from banks  and other mortgage lenders on what is called the secondary market.  Banks and Mortgage Companies sell their mortgage loans to Fannie shortly after they make them in order to free up capital to make new loans.  Since all banks want the option to sell their loans now or in the future they always adhere to Fannie Mae requirements.

 Because Fannie Mae buys so many loans they get to make the rules for the entire industry.   Fannie Mae has very specific requirements which a loan must meet before they will purchase it.  Lenders sometimes refer to these requirements as underwriting requirements.  In the last two years, Fannie has been changing their requirements on a regular basis making it harder for buyers to qualify.  They are doing this in reaction to all of the loan defaults currently plaguing the housing market.  They believe if they get the requirements ‘right’, home buyers will be far less likely to default on their mortgage loans in the future. All buyers must meet the same requirements regardless of the Lender they are working with. Fannie does not play favorites.  The only exception would be a loan which the bank is going to ‘portfolio’ which means they will keep it on their books and not sell it so they can make their own rules, or as noted below.

Although the idea is sound, in reality it causes havoc in the real estate industry.  As and example, a buyer may be preapproved for a loan at the time they make an offer to purchase and by time the loan is ready to close the rules have changed and they no longer qualify. Another conflict is that they are making it harder for buyers to qualify, so there are fewer buyers in the market to purchase homes. Sellers that can’t make their payments because of a job loss or other hardships and can’t sell, have no real option but to let the home go into foreclosure.  Since it’s the high number of loans that are defaulting that is  triggering Fannie to tighten their requirements in the first place, we end up in a circle that we can’t break out of.

Fannie Mae only buys conventional loans.  They do not buy FHA, VA or USDA loan so those program have their own lending requirements which are often less stringent.

Fannie Mae has nothing to do with setting interest rates.