Posted 08/25/2008

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What Is A “Conforming Mortgage”?

Dan Green

The Mortgage Reports Contributor

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.

Dan Green

The Mortgage Reports Contributor

Dan Green is an expert on topics of money. He has been featured in The Washington Post, MarketWatch, Bloomberg, and others.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2017 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)