Fannie Mae is a quasi-governmental agency that makes buying or renting a home more affordable, while also reducing the risks for lenders. It plays a crucial role in maintaining the 30-year fixed-rate mortgage, the most popular home-loan option on the market.
But what, exactly is Fannie Mae? Learn what Fannie Mae is, how it works, and how it affects investors and homeowners.
Definition and Examples of Fannie Mae
Fannie Mae is short for “Federal National Mortgage Association” (FNMA). A government-sponsored enterprise (GSE) founded in 1938, Fannie Mae is a privately held agency established by Congress to improve credit flow in parts of the U.S. economy. A GSE provides financial services to the public for various things, especially mortgages, by maintaining capital market liquidity.
Fannie Mae is currently under the conservatorship (oversight) of the Federal Housing Finance Agency (FHFA). Because of this, the Treasury Department financially supports Fannie Mae through senior preferred stock purchase agreements, and the GSEs are allowed to retain their earnings to satisfy capitalization rules.
Fannie Mae’s main job is purchasing mortgages from banks, mortgage brokers, and credit unions. These purchases free up lenders’ funds so they can provide more loans. FNMA then packages some of the mortgages it buys into mortgage-backed securities.
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.
In 2020, Fannie Mae provided $1.4 trillion to fund the housing market. Between buying, refinancing, and renting, it was responsible for financing 6 million U.S. homes.
How Fannie Mae Works for Homebuyers
Most banks and mortgage lenders provide loans that are guaranteed by Fannie Mae. However, all lenders offering FNMA loans must be approved by the organization, and agree to its lending standards.
The maximum Fannie Mae loan amount for a single-family home in 2021 is $548,250 in 48 states and $822,375 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
To qualify for a Fannie Mae loan, you need a minimum credit score of 620, and a debt-to-income (DTI) ratio of 36% or lower (in some cases, your DTI can be as high as 45%). You will also need to complete the Uniform Residential Loan Application, which your lender will give you.
Fannie Mae offers a HomeReady mortgage, too, which is helpful if you don’t have enough money for a large down payment, plan to include a co-borrower on the loan, or you have non-traditional income sources. A HomeReady mortgage only requires a 3% down payment. In addition, other people–like your parents–can serve as co-borrowers to help you qualify. This mortgage also requires borrowers to complete an online homeownership education course.
If you already have a loan owned by Fannie Mae and you get into financial trouble, there are forbearance and loan modification programs that can provide financial relief. Also, disaster recovery help is available for both homeowners and renters.
In 1938, Congress created Fannie Mae as a secondary mortgage market for loans insured by the FHA (Federal Housing Authority). In 1968, Fannie Mae became a shareholder-owned company—listed on the New York Stock Exchange (NYSE)—that could buy any mortgage, not just those insured by the government.
Fannie Mae is often called the sister of Freddie Mac, a similar organization that serves smaller banks.
The subprime mortgage crisis, which resulted in the Great Recession, made it difficult for both Fannie Mae and Freddie Mac to guarantee the excess of bad loans. In September 2008, Congress authorized the Treasury to purchase up to $200 billion in their preferred stock and mortgage-backed securities. In this Fannie Mae and Freddie Mac bailout, the Treasury paid $116 billion for Fannie Mae.
To keep the companies solvent, the government nationalized them. However, it was expensive, and cost taxpayers $187 billion over time. Four years later, the Treasury began sending profits into its general fund. Through 2018, Fannie Mae had paid back $176 billion in dividends.
Fannie Mae’s Impact
Fannie Mae’s existence has an important influence on individual and national finances.
How It Affects the U.S. Economy
Before the financial crisis, Fannie Mae had a significant role in creating paths to homeownership for many low- and moderate-income families. It is often blamed for the subprime crisis, but actually, it was the banks that repackaged their mortgage-backed securities into bundles that led to unethical practices. Following the crisis, Fannie Mae kept the housing industry on life support by purchasing and guaranteeing mortgage loans.
What It Means for Homebuyers
Fannie Mae helps Americans by increasing opportunities for homeownership. It does this by keeping mortgage costs low and making them more readily available. For low- or moderate-income families, it expands access to affordable loans.
What It Means for Individual Investors
Up until 2010, Fannie Mae stock traded on the NYSE. However, in July of that year, Fannie Mae announced its preferred and common stock would trade on the OTC Bulletin Board. While investors can still buy common stock and junior preferred stock, the conservatorship doesn't allow dividends to be paid.
- Fannie Mae makes homeownership more affordable.
- It expands the number of people who qualify for mortgages.
- Fannie Mae makes mortgage lending less risky.
- It was instrumental in sustaining the housing market during the Great Recession.
- Fannie Mae was bailed out during the housing crisis, but has repaid those funds to the Treasury.