Before we get into the meat of this chapter, we think it is appropriate to give you some background information on the origin of Fannie Mae. Fannie Mae and Freddie Mac have been in the news lately with regard to some of their business practices and risk taking. Apparently, they are making investments that leave them open to substantial losses if interest rates go up. We wont even touch the accounting conversation!

Suffice it to say that without Fannie Mae and Freddie Mac, real estate lending as we know it would not be possible. You may decide to make an investment in Fannie Mae, itself, given that it is a publicly traded company on the New York Stock Exchange.

Secondary Mortgage Market

The secondary mortgage market was created in the 1930s in response to the failure of banks and thrifts during the Great Depression. People would put their money in a bank and receive a passbook in return. The bank would then loan the money from all the passbooks to people in the community to finance things like real estate purchases.

When the depression hit, people panicked and went to the banks to get their money out. Unfortunately, the banks were holding mortgage paper and did not have the liquidity to give all the passbook holders their cash back. That caused many, many banks to fail.

Fannie Mae (the Federal National Mortgage Association) was created to keep liquidity in the banking system. People would still put their money in the banks. The banks would still loan that money out to consumers in the primary mortgage market so they could finance their real estate purchases. The banks would receive mortgage paper from the borrowers in return for the loan proceeds.

Now the banks could turn around and sell the mortgage paper to Fannie Mae for cash. Fannie Mae then packages millions of dollars of mortgage paper and creates a pool of securities that are backed by the mortgages. Fannie Mae then sells these mortgage-backed securities to large institutional investors to get its cash back. Then the cycle repeats.

The Primary and Secondary Mortgage Market

Money Money

Primary Secondary

Borrowers ~~~~~~ Lenders ~~~~~~ Fannie Mae ~~~~~~ Investors Market Market

Paper ~~~~~~~~~~~~-> Paper ~~~~~~~~~~~~~>

In chapter 6 we told you we would present more information on the Fannie Mae pre-foreclosure sale program. We present it here with a caveat. Just as VA REO rules changed, as we pointed out in the last chapter, Fannie Mae may pull the plug or change the rules on the pre-foreclosure sale program. If Fannie Mae foreclosures are going to be an area you invest in, as with any investment choice, you have to keep yourself informed.

We include in this chapter information on Freddie Mac (Fannie Maes little brother) and Federal Deposit Insurance Corporation (FDIC) foreclosures. The FDIC is the parent of the Resolution Trust Corporation (RTC), which handled the savings-and-loan debacle of the 1990s. Every one of these entities wants to be a lender for and not an owner of real estate. They want to make a deal with you. Be patient. If you dont like the numbers, move on to another deal.

The Fannie Mae Pre-Foreclosure Sale Program

Fannie Mae is willing to pursue a pre-foreclosure sale at any time prior to the actual foreclosure. It will do this if Fannie Maes acquisition of the property is the most likely situation at the foreclosure sale. Fannie Mae will proceed with the pre-foreclosure sale if the proceeds of the sale, along with the mortgage insurance settlement, will make them whole or result in a loss less than the one incurred if the property is acquired as an REO.

The Listing Brokers Responsibilities

Once the borrower/owner has worked with the servicing lender and Fannie Mae to determine that he or she is eligible for a pre-foreclosure sale, the borrower/owner will select a listing broker and execute a listing agreement. All parts of the listing agreement are between the broker and the borrower/owner and are not negotiated by the servicing lender or Fannie Mae.

Fannie Mae encourages borrowers to enter into a standard listing agreement that provides for payment of prevailing commissions; however, it cannot dictate what that agreement will be. Also, it cannot direct borrower/owners to use a certain real estate broker, although a list of brokers will be provided by Fannie Mae.

Fannie Mae recommends that the listing broker be prepared to distribute the submission package (detailed in the next section) and earnest money agreement to all involved institutions concurrently. These include the servicing lender, the mortgage insurance company (where applicable), and Fannie Mae.

The submission of the information to all institutions at one time will assist in expediting the acceptance and approval process. However, the listing agents direct contact must always be with the borrower and the servicing lender. The listing broker should provide any assistance necessary to the borrower/owner in the preparation of the complete submission package.

Submission Package

The submission package should include the borrowers letter of hardship, current financial statement, current pay stub, and the prior years