What Is Fannie Mae?
Fannie Mae, formally known as the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) that was created to expand the secondary mortgage market in the United States. By purchasing mortgages from lending institutions and offering them to investors, Fannie Mae provides liquidity and stability to the mortgage market, thereby increasing the availability of funds for homeowners.
Historical Context
Fannie Mae was established in 1938 as part of the New Deal, initiated by President Franklin D. Roosevelt. It initially functioned as a government agency tasked with addressing housing issues during the Great Depression. Fannie Mae was privatized in 1968 to remove its activities from the federal budget, transforming it into a shareholder-owned company.
Role and Function
Fannie Mae operates by buying mortgages from lenders such as banks and mortgage companies. This process provides those institutions with capital to issue more mortgages. The purchased mortgages are then bundled into mortgage-backed securities (MBS) and sold to investors in the secondary market. This model ensures a continuous flow of money into the housing finance system.
Key Operations
Mortgage-Backed Securities
Mortgage-backed securities (MBS) are a core feature of Fannie Mae’s operations. By pooling mortgages and selling these pools to investors, Fannie Mae transfers the risk associated with mortgage defaults to the private market. This encourages more lending by reducing the risk for originating lenders.
Liquidity and Stability
Fannie Mae’s participation in the mortgage market has aimed at enhancing liquidity and stability. By providing a steady stream of funds to mortgage lenders, Fannie Mae helps to stabilize the housing market, especially during economic downturns.
Affordable Housing
Fannie Mae also has a mandate to facilitate affordable housing for low- and moderate-income households. It undertakes various programs and initiatives to ensure that underserved communities have better access to homeownership.
Comparison with Freddie Mac
Fannie Mae and Freddie Mac (Federal Home Loan Mortgage Corporation) are often mentioned together. Both are GSEs with the common objective of enhancing the secondary mortgage market. However, they differ in their mortgage products and targeted lenders. While Fannie Mae typically deals with larger financial institutions, Freddie Mac primarily works with smaller banks.
Fannie Mae vs. Freddie Mac
| Feature | Fannie Mae (FNMA) | Freddie Mac (FHLMC) |
|---|---|---|
| Established | 1938 | 1970 |
| Primary Lenders | Larger financial institutions | Smaller banks and thrift institutions |
| Main Operations | Purchases conventional and government-backed loans | Primarily purchases conventional loans |
Related Terms
- Mortgage-Backed Security (MBS): A type of asset-backed security secured by a collection of mortgages.
- Government-Sponsored Enterprise (GSE): A financial services corporation created by Congress to enhance the flow of credit to targeted sectors of the economy.
- Secondary Mortgage Market: A market where existing mortgage loans are bought and sold.
- Freddie Mac (FHLMC): Another GSE created to expand the secondary mortgage market.
- Affordable Housing: Housing deemed affordable to those with a median household income as rated by the national government.
FAQs
What does Fannie Mae stand for?
How does Fannie Mae support the housing market?
How does Fannie Mae differ from Freddie Mac?
Is Fannie Mae a government agency?
References
- “Fannie Mae and Freddie Mac: A Legal and Regulatory History.” Congressional Research Service.
- “Fannie Mae—Our Charter.” Federal National Mortgage Association official website.
- “Fannie Mae and Mortgage-Backed Securities.” U.S. Securities and Exchange Commission.
Summary
Fannie Mae (Federal National Mortgage Association) is a pivotal government-sponsored enterprise aimed at enhancing the liquidity of the mortgage market, thereby increasing homeownership opportunities. By purchasing mortgages and converting them into mortgage-backed securities, Fannie Mae provides essential support to the housing finance system, ensuring stability and availability of credit for potential homeowners.
This comprehensive coverage of Fannie Mae delves into its history, key operations, role, and comparisons with related entities, equipping readers with a thorough understanding of its importance in the housing finance landscape.
