The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a publicly owned Government-Sponsored Enterprise (GSE) established in 1938. Its primary function is to purchase mortgages from lenders and resell them to investors. This entity plays a crucial role in the U.S. housing market and is a key participant in mortgage-backed securities (MBS).
Introduction to Fannie Mae
Fannie Mae was chartered during the Great Depression as part of the New Deal to promote homeownership and increase liquidity in the mortgage market. As a GSE, it has a public mission but operates somewhat like a private corporation.
Role and Function
- Purchasing Mortgages: Fannie Mae buys mortgages from banks and other lenders.
- Reselling Mortgages: These purchased mortgages are then repackaged into MBS and sold to investors, creating liquidity for more lending.
Government Involvement and Conservatorship
Charter and Regulation
Fannie Mae was initially created to support the secondary mortgage market by purchasing FHA-insured loans. Over time, its portfolio expanded to include a variety of mortgage products, including those not backed by the government.
2008 Financial Crisis and Conservatorship
On September 6, 2008, due to the subprime mortgage crisis, Fannie Mae was placed under conservatorship by the U.S. government. The Federal Housing Finance Agency (FHFA) now oversees its operations, and the government owns an 80% stake in its stock.
Types of Mortgages Handled by Fannie Mae
- FHA-backed Mortgages: These are mortgages insured by the Federal Housing Administration, which reduces lender risk and allows for lower down payments.
- Conventional Mortgages: These are not backed by any government agency and can be further classified into conforming and non-conforming loans.
Example Mortgage Products
- Fixed-rate Mortgages: The interest rate remains constant throughout the loan term.
- Adjustable-rate Mortgages (ARMs): The interest rate can change periodically based on market conditions.
Historical Context
Formation and Early Years
Fannie Mae was founded in 1938 as part of the New Deal. Its original purpose was to buy FHA-insured mortgages to provide more capital to lenders and increase homeownership rates in the U.S.
Growth and Privatization
In 1968, Fannie Mae was converted into a publicly traded company to remove its activities from the federal budget. However, it retained special privileges and support as a GSE.
Financial Instruments and MBS
What Are Mortgage-Backed Securities?
MBS are pools of mortgages that are sold to investors. These securities are backed by the mortgage payments made by homeowners, providing a means for lenders to access more capital quickly.
Example of MBS Process
- Fannie Mae purchases a group of mortgages.
- These mortgages are bundled and structured into MBS.
- The MBS are then sold to investors, who receive a portion of the mortgage payments.
Comparisons and Related Terms
Freddie Mac
Another GSE, the Federal Home Loan Mortgage Corporation (Freddie Mac), has a similar role to Fannie Mae but was created later (in 1970) to provide competition and support to the mortgage market.
FAQs
Q: What does it mean that Fannie Mae is under conservatorship?
Q: How does Fannie Mae impact the mortgage market?
Q: What is the difference between FHA-backed and conventional mortgages?
References
- U.S. Department of Housing and Urban Development: History of Fannie Mae
- Federal Housing Finance Agency: Fannie Mae Conservatorship
- Investopedia: Fannie Mae
Summary
The Federal National Mortgage Association (FNMA), or Fannie Mae, is a fundamental component of the U.S. housing market. Established in 1938 and placed under government conservatorship in 2008, it continues to provide liquidity by purchasing and reselling mortgages. Through its operations, Fannie Mae supports homeownership and helps stabilize the real estate market.
