Understanding The FHA: Freddie, Fannie, and Ginnie

A mortgage is a special type of loan that can allow almost anyone to eventually own a loan. Owning a home can be a great investment and for many, getting a mortgage is the only way that this can be achieved. The first mortgages actually date back to medieval times, but they have changed a great deal since then.

A Brief Introduction to Mortgages and Their History

Basically, a mortgage is just a loan that uses a home or land as collateral. Typically, historians credit England with having created the first mortgages, but these were often very unfair to the borrower. For instance, these first mortgages would require a very large down payment by todays standards, often over 50% and the borrower was not considered to actually own the land, until the mortgage had been completely paid off. It would not be until the 17th century that the rights of borrowers would begin to take a turn upwards, when it became the standard for the borrower to have ownership rights to the land, even if it had not been paid off yet.

Early Tax Credits For Property Owners

Today, in addition to the general benefits of owning a home, such as not having a landlord and being able to modify the home and property however you wish, there are also a number of other tax benefits. The mortgage interest deduction, which allows a tax payer to deduct interest payments from their taxes, was instated in 1913 and today is a very powerful incentive for home ownership.

While today, many people take advantage of this tax credit, at the time it was intended to stimulate business mortgages, because during the beginning of the 20th century, most homeowners would save up their money until they had enough time to purchase a home without a mortgage.

The Creation of the Federal Housing Administration

It would not be until the US Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae) were created that average citizens began taking advantage of the tax credit allowing interest payments to be deducted from their taxes. This is because these institutions were in part responsible for increasing the amount of money available to lenders, which in turn allowed the lenders to offer more home loans.

Current Tax Credits for New Homeowners

Currently, there is another powerful incentive for new homeowners, who can receive 10% of the cost of their home in the form of a credit from the federal government. This can be up to $8,000 and is part of the Federal Housing Tax Credit for new Homeowners.

Prior to the Great Depression, most lenders took money from deposits and lend it out to new homeowners. However, when the banking system began to crumble, the Federal Government created a several government agencies to fund the mortgage market.

Who or What is Fannie Mae, Freddie Mac, and Ginnie Mae

Today, the government agencies responsible for circulating funds in the mortgage market are the Federal National Mortgage Association (Fannie Mae,), the Federal Home Loan Mortgage Corporation (Freddie Mac,), and the Government National Mortgage Association (Ginnie Mae.) These agencies help support the home mortgage industry and act in some regards as a stock market.

Fannie Mae is responsible for creating financial products, which help low to middle income families purchase homes. Ginnie Mae creates a number of security products that are made up of mortgage loans is part of HUD, which is the US Department of Housing and Urban Development. Ginnie Mae has a guarantee that even if the debtors become delinquent, investors who purchase their securty products will still get paid. Freddie Mac is in some regards similar to Ginnie Mae, because they also create investment packages, which are guaranteed, then reinvest this money in the mortgage market.

Where Does the Money For Mortgages Come From

Often, people think of their bank as the source of their loan, but in many cases this is only partially true. Often, the bank will simply process the application and take the monthly mortgage payment, but they are not the one actually lending the money. Instead, they are simply servicing the loan and the actual lenders are investors who have purchased mortgage based securities.

One of the reasons that mortgage based securities are so popular as investments is that even if the homeowner is unable to pay for their home and goes into foreclosure, the investors still have the land and home. They are in turn almost always able to sell this property, in many cases still making a profit.