There’s a very good chance you’ve heard of Fannie Mae. But do you know what it does and how it operates?
The Federal National Mortgage Association (FNMA), typically known as Fannie Mae, is a government-sponsored enterprise (GSE) founded in 1938 by Congress during the Great Depression as part of the New Deal. It was established to stimulate the housing market by making more mortgages available to moderate- to low-income borrowers. ? ?
Fannie Mae does not originate or provide mortgages to borrowers. But it does purchase and guarantee them through the secondary mortgage market. In fact, it’s one of two of the largest purchasers of mortgages on the secondary market. The other is its sibling, the Federal Home Loan Mortgage Corporation, or Freddie Mac, another government-sponsored enterprise created by Congress.
- Fannie Mae is a government-sponsored enterprise that makes mortgages available to low- and moderate-income borrowers.
- It does not provide loans, but backs or guarantees them in the secondary mortgage market.
- Fannie Mae provides liquidity by investing in the mortgage market, pooling loans into mortgage-backed securities.
- Fannie Mae was bailed out by the U.S. government following the financial crisis and was delisted from the NYSE.
Fannie Mae’s Early Days
In the early 1900s, getting a mortgage-let alone a home-was not an easy task. Many people couldn’t afford to secure a down payment, and loans were almost always short-term-not like those with the long-term amortization periods we know of today. In fact, when many of the loans came due at the time, they normally called for large balloon payments from the debtor.
The bank would foreclose if the homeowner couldn’t make the payment or refinance. That would become difficult with the onset of the Great Depression. Annual foreclosure rates rose every year from 1926 (the first year figures were kept) until 1934, when the rate peaked at well over 12%. ? ?
The United States Congress responded by creating Fannie Mae. The aim was to help create a stream of housing funding available to everyone in every market. This led to the financing of long-term fixed-rate mortgages, allowing homeowners to refinance their loans at any point during the course of their loan. ? ?
In 1968, Fannie Mae began funding itself by selling stock and bonds after the government removed it from the Federal Budget. ? ? Fannie Mae retained its ties to the government as a GSE, though, with a board of directors comprised of no more than 13 members. ? ? It is also exempt from local and state taxes. ? ?
By investing in the mortgage market, Fannie Mae creates more liquidity for lenders such as banks, thrifts, and credit unions, which in turn allows them to underwrite or fund more mortgages. The mortgages it purchases and guarantees must meet strict criteria. For example, the limit for a conventional loan for a single-family home in 2021 is $548,250 (up from $510,400 in 2020) for most areas and $822,375 (up from $765,600 in 2020) for high-cost areas. These areas include Hawaii, Alaska, Guam, and the U.S. Virgin Islands, where average home values are above the baseline amount by at least 115%. ? ?
In order to do business with Fannie Mae, a mortgage lender must comply with the Statement on Subprime Lending issued by the federal government. The statement addresses several risks associated with subprime loans, such as low introductory rates followed by higher variable rates; very high limits on how much an interest rate may increase; limited to no income documentation; and product features that make frequent refinancing of the loan likely. ? ? ? ?