Explain whether you agree or disagree with the following statements:
"Freddie Mac and Fannie Mae are only allowed to purchase conforming conventional loans."
What will be an ideal response?
The two GSEs, Fannie Mae and Freddie Mac, can purchase any type of loan; however,the only conventional loans that they can securitize to create a mortgage-backed securityare conforming loans, that is conventional loans that satisfy their underwriting standards. More details are given below.
One of the ways that GSEs fulfill their mission is by buying and selling mortgages.Theloans they purchase can be held in their portfolios or packaged to create an MBS. Fannie Mae and Freddie Mac canbuy or sell any type of residential mortgage, but the mortgages that are packaged into securitiesare restricted to government loans and those that satisfy their underwriting guidelines. The conventional loans that qualify are referred to as conforming loans. A conforming loan is simply a conventional loan that meets the underwriting standard of Fannie Mae and Freddie Mac. Thus, conventional loans in the market are referred to as conforming conventional loans and nonconforming conventional loans.
One of the underwriting standards is the loan balance at the time of origination. Asnoted in the previous section, conventional loans that meet the underwriting standards ofthe two GSEs are called conforming limits. But there are other important underwritingstandards that must be satisfied.
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