What Is Fannie Mae? (FNMA)
The Two Critical Ways Fannie Mae Helps You
Fannie Mae is the Federal National Mortgage Association. It is a former government-sponsored enterprise that is under the conservatorship of the Federal Housing Finance Agency. The U.S. Department of the Treasury owns all its senior preferred stock. That means all of FNMA's profits go to the U.S. Treasury. Investors can still buy common stock and junior preferred stock. The conservatorship doesn't allow them to pay dividends. Stockholders hope one day the government ends the conservatorship. That is unlikely.
What It Does
Fannie Mae buys mortgages from banks, mortgage brokers, and credit unions. That gives banks money to make more loans. It also transfers the risk of default from the bank to Fannie Mae.
Fannie then packages similar types of loans into mortgage-backed securities. It sells the securities to investors. These include hedge funds, pension funds, other banks, and even individual investors.
Fannie Mae continues to own the underlying mortgages. It pays the investors their pro-rated share of each month's mortgage payment. That includes both the principal and interest. The Federal Reserve Bank of New York makes the payment through a wire transfer.
Fannie Mae guarantees the payment. But investors sustain three risks.
- The homeowner could prepay the mortgage. That means the investor receives less than he or she originally thought.
- If interest rates fall, then homeowners will refinance. In that case, they will prepay the mortgage. Falling interest rates will lower the value of the MBS.
- The borrower may default. However, Fannie Mae guarantees the payment, so the investor doesn't have that risk. On the other hand, if many borrowers default, it could conceivably overwhelm Fannie Mae's ability to make timely payments.
Fannie Mae also provides financing for the development of affordable rental housing.
A certain percentage of Fannie Mae's mortgages must serve low and moderate-income families.
FNMA was created in 1938 to establish a secondary mortgage market for loans insured by the Federal Housing Administration. In 1968, Fannie Mae became a shareholder-owned company that could buy any mortgage, not just those insured by the government. It was even listed on the New York Stock Exchange.
The subprime mortgage crisis overwhelmed FNMA's ability to guarantee all those bad loans. After many bailouts and attempts to keep FNMA solvent, the federal government nationalized the company. Fannie Mae and Freddie Mac were brought down by the subprime mortgage crisis.
On July 8, 2010, Fannie Mae announced its preferred and common stock would trade on the OTC Bulletin Board, instead of the New York Stock Exchange and the Chicago Stock Exchange.
How It Affects the U.S. Economy
Before the crisis, Fannie Mae stimulated the housing market, which made up 10 percent of the economy. That created wealth for homeowners who could then afford higher-priced homes. Fannie Mae also allowed low and moderate income families to get a financial cushion beneath them, and a higher standard of living, in the form of home ownership.
Fannie Mae was involved in the crisis, but did not cause it. The MBS were repackaged by banks as collateralized mortgage obligations. These took MBS and sliced them into tranches. For example, they put all the low-interest payments into one tranche. Investors who wanted less risk bought those. Others bought the high-interest payments.
These CMOs were guaranteed by credit default swaps. When housing prices started falling in 2006, no one knew what the CMOs were worth. AIG could not repay all the CDS it had issued. Many people thought Fannie and Freddie caused the subprime mortgage crisis. But, in fact, it was these derivatives.
Since the crisis, Fannie Mae has kept the housing industry on life support. As of 2010, housing only made up 2 percent of the economy. Fannie Mae and another former government-owned enterprise, Freddie Mac, now guarantee 90 percent of all mortgages. In other words, banks (which formerly lent to just about everyone with a pulse) now won't lend anyone without a government guarantee.
How It Affects You
Fannie Mae helps you in two ways:
- If you are a homeowner, then Fannie Mae helps keep mortgage costs low by making funding for mortgages more readily available.
- If you qualify as a low or moderate income family, such as a teacher, police officer, firefighter or health care worker, Fannie Mae will provide you with a mortgage you couldn't otherwise afford.
Fannie Mae's Future
FNMA shareholders asked the White House to make Fannie and Freddie private again. They realized the two are a good business investment. Future shareholders could make a good return on investment if the two were private.
There are many in Congress who would like to dissolve Fannie and Freddie. They see it as unneeded government interference in the housing market. (Source: "Status Quo for Fannie, Freddie," The Wall Street Journal, October 20, 2015.)