What Is A “Conforming Mortgage”?

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Lately, Fannie Mae and Freddie Mac have been in the news every day as economists and lawmakers question the future of conforming mortgages.

But among everyday Americans, a more common question is:

"What is a conforming mortgage?"

A conforming mortgage is one that adheres to the mortgage guidelines set forth by mortgage securitizers Fannie Mae and Freddie Mac.

But that's jibberish.

Conforming mortgage are so-called because, literally, they conform to what Fannie and Freddie will allow on a mortgage.

For home buyers and people in want of a mortgage refinance, conforming mortgages are where it's at -- the ultimate combination of low rates and huge product selection.

It's not that banks can't compete with Fannie and Freddie on interest rates for a given home loan -- they can.  It's that local banks lack the capacity to do it on a grand scale.

Consider what happens to conforming mortgages after a closing:

• First, the individual mortgage is combined with thousands of other mortgages to make one giant mortgage blob
• Next, the giant mortgage blob is split back into lots of tiny pieces
• Then, the tiny pieces are sold to Wall Street as mortgage-backed bonds
• And, as a final step, Fannie Mae and Freddie Mac attach a "guarantee of repayment" to each bond sold

It's this last step that makes conforming mortgages so (relatively) inexpensive.  Because the debt is guaranteed, Wall Street doesn't demand as high of a return as it does for, say, jumbo loans or for sub-prime ones.

Conforming mortgages are nearly risk-free to investors and their interest rates reflect that.

The opposite of a conforming mortgage is a portfolio loan, a mortgage offered by a local bank to be held on its own books.  Other mortgage types include FHA, VA and Alt-A.  Because each of these loan types have their own rules and guidelines, the "conforming" rulebook does not apply.