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Fannie Mae: Revolutionizing the Mortgage Market

Fannie Mae, known formally as the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise (GSE) and a publicly traded company. Established in 1938 during the Great Depression, Fannie Mae's mission is to expand the...

Fannie Mae, known formally as the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise (GSE) and a publicly traded company. Established in 1938 during the Great Depression, Fannie Mae's mission is to expand the secondary mortgage market by securitizing mortgage loans into mortgage-backed securities (MBS). This allows lenders to reinvest their assets into more lending, thereby increasing the availability of affordable housing.

Fannie Mae total assets Fannie Mae's Total Assets

With over $4.3 trillion in assets, Fannie Mae is the largest company in the United States and the fourth largest company in the world. It plays a pivotal role in the housing finance system and the overall economy.


Background and Early Decades

In the early 1900s, housing loans in the United States were primarily short-term mortgage loans with balloon payments. However, the Great Depression had a severe impact on the housing market, leading to widespread defaults and foreclosures. To address this crisis, Fannie Mae was established in 1938 as part of Franklin Delano Roosevelt's New Deal.

Originally chartered as the National Mortgage Association of Washington, Fannie Mae aimed to provide local banks with federal money to finance home loans. By creating a liquid secondary mortgage market, Fannie Mae facilitated the issuance of more housing loans, primarily through purchasing Federal Housing Administration (FHA) insured mortgages. For the first three decades, Fannie Mae enjoyed a monopoly over the secondary mortgage market, expanding homeownership and providing a boost to the building trade.

Government-Sponsored Enterprise Status and Expansion

In 1954, Fannie Mae became a "mixed-ownership corporation," with the federal government holding preferred stock and private investors holding common stock. In 1968, it converted into a privately held corporation to remove its activity and debt from the federal budget. This change led to the creation of the Government National Mortgage Association (Ginnie Mae) as Fannie Mae's brother organization.

Ginnie Mae, the only home-loan agency explicitly backed by the full faith and credit of the United States government, guarantees FHA-insured mortgage loans, as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages. In the same year, Fannie Mae went public on the New York and Pacific Exchanges.

1990s: Affordable Housing Goals and Expansion

In 1992, the Housing and Community Development Act required Fannie Mae and Freddie Mac to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. These goals aimed to increase accessibility to affordable housing for low- and moderate-income families.

In 1999, Fannie Mae faced pressure from the Clinton administration to expand mortgage loans to low and moderate-income borrowers in distressed inner city areas designated in the Community Reinvestment Act (CRA) of 1977. This expansion into the subprime market raised concerns about increased risk and potential government bailout.

2000s: Financial Crisis and Conservatorship

In the early 2000s, Fannie Mae faced scrutiny for its accounting practices and alleged manipulation of earnings to maximize executive bonuses. The company's exposure to subprime mortgages and its involvement in the subprime market raised concerns about its financial stability.

The subprime mortgage crisis that emerged in 2007 further exacerbated Fannie Mae's troubles. The shift towards riskier mortgages and private-label securitization undermined the GSE's power and led to a sharp deterioration in underwriting standards. As the housing market collapsed, Fannie Mae and fellow GSE Freddie Mac faced massive losses, ultimately requiring a government conservatorship in 2008.

Franklin Raines Franklin Raines, former CEO of Fannie Mae

Controversies and Lawsuits

Fannie Mae has faced several controversies and legal challenges throughout its history. In 2004, the Office of Federal Housing Enterprise Oversight accused the company of widespread accounting errors. Fannie Mae's former CEOs, Franklin Raines and James A. Johnson, faced allegations of accepting loans below market rate from Countrywide Financial, one of Fannie Mae's biggest mortgage providers, raising concerns about conflicts of interest.

In 2011, Fannie Mae and other financial institutions were sued by the Federal Housing Finance Agency (FHFA) for misrepresenting the quality of mortgage-backed securities sold to Fannie Mae and Freddie Mac. Several lawsuits and investigations followed, resulting in significant penalties and settlements.

Today and the Future

As of 2022, Fannie Mae continues to play a critical role in the mortgage market, providing liquidity to loan originators and contributing to the availability of affordable housing. The company focuses on borrowing at low rates to invest in mortgage loans and mortgage-backed securities. It sets guidelines for conforming loans and plays a vital role in the secondary mortgage market.

Fannie Mae's leadership, including current CEO Priscilla Almodovar, is committed to operating the company responsibly and in line with regulatory requirements. Fannie Mae aims to support sustainable homeownership and promote affordability in the housing market.

Despite its turbulent history, Fannie Mae remains a significant player in the mortgage industry and continues to shape the housing finance landscape in the United States.

References available at Fannie Mae's Wikipedia page.