There’s a extremely good chance that you’ve heard of Fannie Mae. But do you know what it does and how it operates?
The Federal National Mortgage Alliance (FNMA), typically known as Fannie Mae, is a government-sponsored enterprise (GSE) founded in 1938 by Congress during the Great Depression as have the quality of 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 contrive 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 ancillary market. The other is its sibling, the Federal Home Loan Mortgage Corporation, or Freddie Mac, another government-sponsored enterprise created by Congress.
Fannie Mae’s Beginning Days
In the early 1900s, getting a mortgage—let alone a home—was not an easy task. Many people couldn’t sacrifice to secure a down payment, and loans were almost always short-term—not like those with the long-term amortization ages 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 devise foreclose if the homeowner couldn’t make the payment or refinance. That would become difficult with the onset of the Notable Depression. Annual foreclosure rates rose every year from 1926 (the first year figures were husbanded) until 1934, when the rate peaked at well over 12%.
The United States Congress responded by creating Fannie Mae. The aim was to arrogate 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 credits at any point during the course of their loan.
1938
The year Congress created Fannie Mae.
In 1968, Fannie Mae began ready money itself by selling stock and bonds after the government removed it from the Federal Budget. Fannie Mae retained its take ups to the government as a GSE, though, with a board of directors comprised of no more than 13 members. It is also exempt from townsman and state taxes.
Key Takeaways
- Fannie Mae is a government-sponsored enterprise that makes mortgages available to low- and moderate-income borrowers.
- It does not offer loans, but backs or guarantees them in the secondary mortgage market.
- Fannie Mae provides liquidity by investing in the mortgage buy, 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.
Manufacturing Liquidity
By investing in the mortgage market, Fannie Mae creates more liquidity for lenders such as banks, thrifts, and esteem unions, which in turn allows them to underwrite or fund more mortgages. The mortgages it purchases and guarantees sine qua non 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 ranges. These areas include Hawaii, Alaska, Guam, and the U.S. Virgin Islands, where average homes values are over the baseline amount by at least 115%.
In order to do business with Fannie Mae, a mortgage lender must comply with the Assertion on Subprime Lending issued by the federal government. The statement addresses several risks associated with subprime lends, such as low introductory rates followed by a higher variable rates; very high limits on how much an interest take to task may increase; limited to no income documentation; and product features that make frequent refinancing of the loan likely.
In 2019, Fannie Mae forearmed more than $650 billion in liquidity to fund the housing market. This helped people across the power buy, refinance, and rent about three million homes.
Fannie Mae backs or guarantees mortgages but does not originate them.
Fannie Mae backs or guarantees mortgages but does not originate them.
Mortgage-Backed Securities
After achieving mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities (MBS). MBS are asset-backed securities secured by a mortgage or paddling pool of mortgages. Fannie Mae’s mortgage-backed securities are purchased by institutions such as insurance companies, pension funds, and investment banks. It undertakings payments of principal and interest on its MBS.
Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio. This invests in its own mortgage-backed protections as well as those from other institutions. Fannie Mae issues debt called agency debt to fund its hired portfolio.
The Financial Crisis
Fannie Mae has been publicly traded since 1968. Until 2010, it traded on the New York Offer Exchange (NYSE). It was delisted following the mortgage, housing, and financial crisis after its stock plummeted below the nadir capital requirements mandated by the New York Stock Exchange. It now trades over-the-counter.
Unethical lending practices led to the crisis. During the homes boom of the mid-2000s, lenders lowered their standards and offered home loans to borrowers with star-crossed credit. In 2007, the housing bubble burst and hundreds of thousands of these borrowers went into default, which led to what was certain as the subprime meltdown. This had a ripple effect on the credit markets, which sent the financial markets into a tailspin and generated the most severe recession in decades in the United States. (For more, see: A Review of Past Recessions.)
Government Takeover and Bailout
In the behindhand half of 2008, Fannie Mae and Freddie Mac were taken over by the government via a
Credit Options
Fannie Mae now offers a thousand of different business initiatives and credit options to homeowners, working with lenders to help people who may otherwise deliver difficulties obtaining financing.
- HomeReady Mortgage: This product allows homeowners to secure financing and purchase a up on with a low down payment. Borrowers qualify if they have low to moderate income and a credit score below 620. Living soul with scores above 620 get better pricing.
- 3% Down Payment: Another resource for homeowners who may not have access to passably funds to secure a large down payment.
- HFA Preferred: This program helps homeowners access affordable resource through local and state Housing Finance Agencies and other lenders. Income-levels for borrowers are determined by the HFA, and there are no first-time purchaser requirements.
A full list of products and their description is available on Fannie Mae’s
Loan Modifications
Following the mortgage meltdown, Fannie Mae originated to focus on
The Bottom Line
Fannie Mae has managed to turn itself around since being on the brink in 2008. Today it is the greatest backer of 30-year fixed-rate mortgages and remains a key mechanism for facilitating homeownership.