The Federal National Mortgage Association (FNMA), more commonly known as Fannie Mae, plays a significant role in the U.S. housing market by ensuring that mortgage lenders have sufficient funds to provide home loans. Established to expand the secondary mortgage market, FNMA purchases mortgages from lenders and either holds these mortgages in its portfolio or packages the loans into mortgage-backed securities (MBS) that may be sold. This process ensures liquidity, stability, and affordability in the housing market.
History of FNMA
FNMA was established during the Great Depression in 1938 as part of the New Deal to increase the supply of affordable housing. Initially, it was a government agency but was later converted into a publicly-traded corporation.
Key Milestones:
- 1938: FNMA founded as a federal government agency.
- 1968: FNMA becomes a government-sponsored enterprise (GSE) and starts operating as a private corporation with public purposes.
- 2008: Entered federal conservatorship during the financial crisis.
Function and Structure
FNMA’s primary function is to enhance the secondary mortgage market. The agency ensures that:
- Liquidity: FNMA buys mortgages from primary lenders, which frees up their capital, enabling them to issue more loans.
- Stability: By providing a steady flow of capital to the mortgage market, FNMA helps stabilize the housing finance system.
- Affordability: FNMA’s operations help lower the cost of borrowing, making homeownership more attainable for many Americans.
Mortgage-Backed Securities (MBS)
FNMA packages the purchased mortgages into MBS, which are then sold to investors. The process involves:
- Issuance: Mortgage loans are pooled together to create MBS.
- Guarantee: Fannie Mae guarantees timely payment of both principal and interest on these MBS.
- Sale: These MBS are sold in the financial markets to investors who seek steady income streams with relatively low risk.
Special Considerations
While FNMA has played a pivotal role in the U.S. mortgage market, it has also faced criticism and scrutiny, especially around:
- Moral Hazard: Concerns over encouraging risky lending practices.
- Systemic Risk: Its significant role in the housing market can have wide-reaching impacts, as seen during the 2008 financial crisis.
Examples and Case Studies
An example of FNMA’s impact can be seen during the financial crisis of 2008 when it entered conservatorship to stabilize the housing market amidst plummeting property prices and soaring foreclosure rates.
Applicability
FNMA’s operations are crucial for:
- Homebuyers: By lowering borrowing costs.
- Lenders: By providing them with liquidity.
- Investors: By offering relatively safe investment opportunities in MBS.
Comparisons
FNMA vs. Freddie Mac
Both FNMA and Freddie Mac are GSEs, but Freddie Mac (Federal Home Loan Mortgage Corporation) focuses on buying mortgages from smaller banks and thrifts, whereas FNMA typically deals with larger commercial banks.
FNMA vs. Ginnie Mae
Ginnie Mae, unlike FNMA, is a government agency that guarantees MBS issued by approved lenders and backed by federally insured or guaranteed loans.
Related Terms
- Government-Sponsored Enterprise (GSE): Financial services corporations created by Congress to enhance the flow of credit to specific sectors of the American economy.
- Secondary Mortgage Market: The market where existing mortgage loans are bought and sold.
- Mortgage-Backed Securities (MBS): A type of investment that represents claims to the cash flows from pools of mortgage loans.
FAQs
Q: What is the purpose of FNMA? A: FNMA enhances liquidity, stability, and affordability in the U.S. housing market by purchasing mortgages from lenders and facilitating mortgage-backed securities.
Q: How does FNMA differ from other GSEs? A: Unlike Freddie Mac, which deals with smaller banks, and Ginnie Mae, which guarantees federally backed loans, FNMA focuses on working with larger commercial banks.
Q: What was FNMA’s role during the 2008 financial crisis? A: FNMA was placed into federal conservatorship to stabilize the housing market and restore confidence in the financial system.
References
- Federal National Mortgage Association (Fannie Mae) Overview
- Economic Reports and Studies on FNMA’s Impact
- Historical Documentation from U.S. Department of Housing and Urban Development
Summary
The Federal National Mortgage Association (FNMA), or Fannie Mae, is a cornerstone of the U.S. housing market. By facilitating the flow of capital through the purchase and securitization of mortgages, FNMA supports greater homeownership opportunities and helps maintain market stability. While it has faced challenges and criticism, its contributions to the housing finance system remain integral.
