Federal national mortgage association

What Is Federal National Mortgage Association (Fannie Mae)?

The Federal National Mortgage Association (FNMA), widely known as Fannie Mae, is a government-sponsored enterprise (GSE) that plays a critical role in the U.S. housing finance system. Its primary function is to provide liquidity to the secondary mortgage market by purchasing mortgages from lenders, thereby allowing those lenders to reinvest funds and issue new loans. Fannie Mae achieves this by packaging these purchased loans into mortgage-backed securities (MBS) and guaranteeing the timely payment of principal and interest to investors, attracting a broader pool of capital into the housing market. Fannie Mae's activities help ensure a stable and affordable supply of mortgage funds across the nation.

History and Origin

Fannie Mae was established by the U.S. Congress in 1938 as part of President Franklin D. Roosevelt's New Deal, born out of the economic turmoil of the Great Depression. Its original mandate was to provide stability to the mortgage market, which was severely distressed due to widespread foreclosures and a lack of available funds for home loans. Initially a federal government agency, Fannie Mae's purpose was to purchase mortgages insured by the Federal Housing Administration (FHA), creating a secondary market where lenders could sell their existing loans and replenish their funds for new lending. This mechanism helped transform the residential real estate landscape by fostering the widespread adoption of long-term, fixed-interest rates mortgages.

Over the decades, Fannie Mae evolved, transitioning from a fully government-owned entity to a private, publicly traded company in 1968, though still operating under a congressional charter. The Federal Housing Finance Agency (FHFA) placed Fannie Mae, along with Freddie Mac, into conservatorship in September 2008, a measure taken to stabilize the housing and financial markets during the financial crisis of that time. Fannie Mae remains in conservatorship as of 2024, operating under the FHFA's direction to preserve assets and restore sound financial condition.⁶

Key Takeaways

• Fannie Mae, officially the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) vital to the U.S. housing market.
• It provides liquidity by buying mortgages from lenders and creating mortgage-backed securities, ensuring a continuous supply of funds for new home loans.
• Established in 1938 during the Great Depression, its role has been to stabilize and promote homeownership.
• Fannie Mae has been in conservatorship under the Federal Housing Finance Agency (FHFA) since the 2008 financial crisis.
• The company's operations indirectly help lower mortgage rates and make home financing more accessible by attracting diverse investors to the secondary mortgage market.

Interpreting the Federal National Mortgage Association (Fannie Mae)

Fannie Mae's impact is primarily seen in the accessibility and affordability of mortgages. By purchasing conventional mortgages from lenders, Fannie Mae standardizes the lending process and creates a liquid market for these loans. This allows banks and other mortgage originators to transfer credit risk and frees up their capital requirements to originate more loans, rather than holding them on their balance sheets. For homebuyers, this translates to more consistent mortgage availability and generally lower interest rates due to the expanded pool of capital.

The underwriting guidelines set by Fannie Mae also serve as industry benchmarks for loan quality. Lenders often refer to "Fannie Mae guidelines" when assessing a borrower's eligibility for a conforming loan, meaning a loan that meets the standards for purchase by Fannie Mae. This standardization helps maintain consistency and reduces risk across the mortgage market.

Hypothetical Example

Imagine a small regional bank, "Community Lending Inc.," has originated $50 million in new home mortgages over the past quarter. If Community Lending Inc. held onto all these loans, its ability to offer new mortgages would be limited by its available capital. However, because these mortgages meet Fannie Mae's underwriting standards, Community Lending Inc. can sell them to Fannie Mae.

Fannie Mae purchases these $50 million in mortgages from Community Lending Inc. The bank now has $50 million back in cash, which it can use to fund another $50 million in new home loans. Fannie Mae, in turn, bundles these mortgages with thousands of others it has purchased from various lenders nationwide, creating a large pool of assets. From this pool, Fannie Mae issues mortgage-backed securities (MBS) to investors. These MBS are attractive to investors because Fannie Mae guarantees the timely payment of principal and interest, even if some of the underlying borrowers default. This entire process demonstrates how Fannie Mae provides essential liquidity to the primary mortgage market.

Practical Applications

Fannie Mae's operations have several practical applications across the U.S. financial system:

• Mortgage Origination: By providing a reliable buyer for mortgages, Fannie Mae enables lenders to offer more loans. This continuous flow of funds helps keep the mortgage market active and responsive to demand.
• Affordability: The secondary mortgage market activities of Fannie Mae and Freddie Mac lower overall mortgage costs. Their guarantees reduce the risk for investors, which in turn leads to lower [interest rates](https://diversification.com/term/interest rates) for borrowers.
• Market Stability: Fannie Mae helps stabilize the mortgage market, especially during periods of stress, by ensuring a consistent supply of mortgage funds. Its role is crucial in supporting both single-family and multifamily housing sectors.⁵
• Regulatory Focus: As a government-sponsored enterprise under conservatorship, Fannie Mae is subject to strict oversight by the Federal Housing Finance Agency (FHFA). This oversight ensures its operations are safe, sound, and align with its public mission. Recently, the FHFA has refined its supervisory approach, emphasizing safety and soundness while clarifying the roles of other consumer protection agencies.⁴

Limitations and Criticisms

Despite its essential role, Fannie Mae has faced significant limitations and criticisms, particularly highlighted by the 2008 financial crisis.

• Implicit Government Guarantee: Historically, Fannie Mae benefited from an implicit government guarantee, meaning investors believed the government would back its debt obligations if it faced financial distress. While this allowed Fannie Mae to borrow at lower rates, it also contributed to moral hazard, potentially encouraging excessive risk-taking without bearing the full consequences.
• Contribution to the 2008 Crisis: During the lead-up to the 2008 crisis, Fannie Mae, along with Freddie Mac, expanded their holdings of higher-risk mortgage-backed securities and engaged in complex derivative strategies. Accounting problems and inadequate risk controls led to massive losses, ultimately necessitating a government bailout and their placement into conservatorship.³
• Market Dominance: As large government-sponsored enterprises, Fannie Mae and Freddie Mac dominate the U.S. housing finance market, which can limit private sector competition and innovation.
• Path to Release from Conservatorship: More than a decade after the crisis, Fannie Mae remains in conservatorship. While various housing reform plans have been proposed, the complexities of ensuring adequate capital requirements, protecting taxpayers, and maintaining market stability have made a full exit challenging. The U.S. Treasury and FHFA continue to work on agreements to facilitate an orderly transition.²

Federal National Mortgage Association (Fannie Mae) vs. Federal Home Loan Mortgage Corporation (Freddie Mac)

Fannie Mae and Freddie Mac are both government-sponsored enterprises that serve similar functions in the U.S. housing finance system. Both were created by Congress to provide liquidity, stability, and affordability to the mortgage market by purchasing mortgages from lenders and securitizing them into mortgage-backed securities. The key difference lies in their historical origins and the types of institutions they initially served. Fannie Mae was established in 1938 to purchase FHA-insured loans from commercial banks. Freddie Mac, on the other hand, was created in 1970 to provide similar services primarily for thrift institutions (savings and loan associations). Today, their operations are largely parallel, both buying and guaranteeing conventional mortgages from a wide range of lenders. They have been under FHFA conservatorship since 2008.

FAQs

What is the primary purpose of Fannie Mae?
Fannie Mae's main purpose is to provide liquidity to the U.S. mortgage market. It does this by buying mortgages from lenders, freeing up capital for them to make new loans, and then packaging these loans into mortgage-backed securities to sell to investors. This process helps ensure a stable supply of funds for home loans.

Is Fannie Mae a government agency?
While originally a government agency, Fannie Mae became a private, publicly traded company in 1968. However, it operates under a congressional charter and has been under government conservatorship by the Federal Housing Finance Agency (FHFA) since 2008, meaning it is currently controlled by the government to stabilize its financial condition.

How does Fannie Mae affect mortgage rates?
By creating a strong secondary mortgage market for mortgages, Fannie Mae attracts a wide range of investors. This increased demand for mortgage-backed securities helps lower the overall cost of borrowing for lenders, which often translates to lower interest rates for homebuyers.

What is the role of Fannie Mae in a mortgage loan?
When you take out a mortgage loan, your lender might sell that loan to Fannie Mae. Fannie Mae does not directly lend money to homebuyers but rather provides funds to the banks and mortgage companies that do. This allows lenders to replenish their capital and continue making new loans, expanding access to homeownership.

Why was Fannie Mae placed into conservatorship?
Fannie Mae was placed into conservatorship in 2008 during the financial crisis because it faced significant financial distress and losses due to widespread defaults on mortgages it had purchased or guaranteed. The government intervened to prevent its collapse and stabilize the broader housing and financial markets. Since then, foreclosure rates have generally been lower than historical averages.¹