Question

Which of the following is true about non-conforming loans?

A. They can be traded on the primary market.
B. They generally cost a homeowner more in fees.
C. They meet Fannie Mae/Freddie Mac standards.
D. All states prohibit them as being predatory.

Answer 1

The true statement about non-conforming loans is that they generally cost a homeowner more in fees and they do not meet the guidelines of Fannie Mae or Freddie Mac. These loans are riskier and may come with higher interest rates.

Step-by-step explanation:

The correct statement about non-conforming loans is B. They generally cost a homeowner more in fees. Non-conforming loans do not meet the underwriting guidelines of Fannie Mae or Freddie Mac, which are government-sponsored enterprises (GSEs) that purchase mortgages on the secondary market. As such, these loans cannot be traded on the primary market as conforming loans can. Non-conforming loans may carry higher interest rates and additional costs because they are considered riskier.

This is due in part to the way securitization works; financial institutions may be less scrupulous in loan origination if they intend to securitize and sell the loan, leading to the creation of subprime loans. These subprime loans, such as those with low or zero down payments and little scrutiny of the borrower's ability to repay, can introduce greater risk to both the lender and the borrower.