What is Fannie Mae?

Published by Thomas Herold in Banking, Economics, Real Estate

'Fannie Mae' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Fannie Mae is the acronym for the FNMA Federal National Mortgage Association. This entity is a GSE Government Sponsored Enterprise along with brother organization Freddie Mac. It became a publicly traded company in 1968. This home lending giant proves to be the largest mortgage financing provider anywhere in the United States. As such, it funds significantly more mortgages than any competing company or entity. It ensures that homebuyers, homeowners, and renters around the U.S. all can obtain financing options which they can afford.

As the GSE became established in 1938, it has provided funding for the housing market of the country for over 75 years. Franklin D. Roosevelt’s New Deal established the company in the midst of the Great Depression. This is why the mission of the company is to aid individuals in purchasing, renting, or refinancing a home whether economic times in the country are good or bad.

The company’s explicit purpose is to boost the size of the secondary mortgage market. They do this when they securitize mortgages and package them into MBS mortgage backed securities. This process returns the mortgage loaned money to lenders who are then able to reinvest this money into additional lending. It also acts to grow the numbers of lending institutions who are issuing mortgages. This ensures that there are more than just savings and loan associations making local loans for housing.

The model worked well until between 2003 and 2004. At this point the subprime mortgages crisis started. It began when the mortgage market turned away from the GSEs like Freddie Mac and Fannie Mae and began to migrate rapidly to unregulated MBS Mortgage Backed Securities that major investment banks put together. This shift to private MBSs caused the GSEs to lose their control over and ability to monitor mortgages in the country.

Increased competition between the investment banks and the GSEs reduced the power and market share of the government mortgage backers further and boosted the mortgage lenders at their expense. This radical change in the way mortgages were overseen and made caused the underwriting standards for mortgages to dangerously decline. It turned out to be one of the major reasons for the ensuing mortgage and financial crises.

The situation became so severe at Fannie Mae by 2008 that the FHFA Federal Housing Finance Agency had to get directly involved. FHFA Director James Lockhart on September 7, 2008 placed both this organization and Freddie Mac under FHFA conservatorship. This proved to be among the most dramatic and far reaching government involvements in free enterprise financial markets for literally decades.

Among Lockhart’s first actions, he fired both companies’ boards of directors and CEOs. He then made the companies issue a new class of common stock warrants and senior preferred stock to Treasury for 79.9% of both GSEs. Those who had been holding either preferred or common stock in either entity before the conservatorship began saw the value of their shares massively decrease. All prior shares’ dividends became suspended to try to hold up the mortgage backed securities’ and company debt values. FHFA pledged that it had no intentions of liquidating the GSEs.

Since 2009, Fannie Mae has made great strides in its business of helping make housing work better for individuals and families. They have injected trillions of dollars into the mortgage markets in lending liquidity. This has gone a long way to helping the housing markets and overall economy to recover.

The company has also gone back to high quality eligibility and underwriting standards. In the first quarter of 2016, they have extended $115 billion in mortgage credit that has allowed for 210,000 homes to be purchased and 256,000 mortgages to be refinanced. They also financed the construction of 161,000 multifamily rental units.

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The term 'Fannie Mae' is included in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.