Fannie Mae and Freddie Mac

Mortgages made by banks and other lenders are typically sold on the secondary market in order to produce cash so the lenders can make more mortgages. The more mortgages a lender makes, the more money it makes because most of its income comes from fees, points and other charges associated with the loan.

The largest purchasers of mortgages on the secondary market are the government-sponsored enterprises (GSEs): the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). These large enterprises were created by congressional charters in order to make mortgages available to more people with low and moderate incomes. They are now private companies. Both Freddie Mac and Fannie Mae have specific requirements for loan products that banks and lenders have to comply with if they want to sell the loan on the secondary market.

They purchase mortgages from lenders and then sell them as securities in the bond market. This provides lenders with the money to make more mortgages. These mortgage-backed securities (MBS) offer investors a good return.

The loan limit for both Freddie Mac and Fannie Mae loans is $300,700 for single-family homes in the United States. This is what defines the "conventional" loan you hear about. Loans higher than that amount are called jumbo loans and usually have higher interest rates. These limits change annually based on the single-family home price survey done by the Federal Housing Finance Board in October.