The Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae, is a government-sponsored enterprise (GSE) established to expand the secondary mortgage market by securitizing mortgage loans, thus allowing lenders to reinvest their assets into more lending. This in turn increases the availability of mortgage credit for homeowners across the United States.
Historical Context
Origins
Fannie Mae was created in 1938 during the Great Depression as part of the New Deal to facilitate liquidity within the mortgage market. Initially, it was a governmental agency. In 1968, it was converted to a shareholder-owned corporation as a means to remove its debt from the federal budget.
Evolution
- 1938: Creation by the Federal Housing Administration (FHA).
- 1968: Conversion into a private shareholder-owned corporation.
- 2008: Placed under conservatorship of the Federal Housing Finance Agency (FHFA) during the financial crisis.
Function and Structure
Primary Role
FNMA purchases and guarantees mortgages from financial institutions and issues its own mortgage-backed securities (MBS), ensuring a continuous flow of funds for home loans.
Business Model
Fannie Mae operates by buying mortgages from lenders, pooling them, and selling them as MBS to investors. This allows lenders to free up capital, enabling them to issue more loans. Fannie Mae guarantees the timely payment of principal and interest on these MBS.
Impact
By purchasing mortgages, FNMA stabilizes the housing finance system and helps lower the cost of homeownership for borrowers by ensuring more consistent availability of mortgage credit.
Economic Impact
Market Liquidity
Fannie Mae enhances liquidity in the mortgage market by acting as an intermediary between lenders and investors. This results in more stable mortgage rates and broader access to home financing.
Risk Management
By pooling mortgages, FNMA helps distribute the risk of defaults. Investors in MBS take on some of this risk, while FNMA provides guarantees that mitigate it further.
Comparisons and Related Terms
Freddie Mac
Like FNMA, the Federal Home Loan Mortgage Corporation (Freddie Mac) is another GSE that buys mortgages and issues MBS. The primary difference lies in their market segments and specific operations, but both aim to stabilize and provide liquidity to the mortgage market.
Ginnie Mae
The Government National Mortgage Association (Ginnie Mae) differs from Fannie Mae and Freddie Mac in that it guarantees MBS backed by federally insured or guaranteed loans, such as FHA and VA loans.
Mortgage-Backed Securities (MBS)
MBS are investment products created by securitizing a pool of mortgage loans. Investors in MBS receive periodic payments derived from mortgage payments made by borrowers.
FAQs
Why was Fannie Mae created?
How does Fannie Mae support the housing market?
What is the role of the FHFA in relation to Fannie Mae?
Summary
The Federal National Mortgage Association, better known as Fannie Mae, plays a critical role in the U.S. mortgage market by providing liquidity and stability. Through its operations as a GSE, FNMA purchases and guarantees mortgages, thereby enabling lenders to issue more home loans and facilitate lower mortgage rates. Originating during the New Deal era, Fannie Mae continues to significantly influence the housing finance landscape, promoting accessible and affordable homeownership.
