Finance in the News: Fannie Mae

September 30, 2008 · Posted in Finance 


Fannie Mae is the nickname given to the Federal National Mortgage Association (FNMA). As a US publically traded government sponsored enterprise (GSE), Fannie Mae was a stockholder owned corporation that was authorized to make loans and loan guarantees. Founded as a government agency in 1938 as part of Roosevelt’s New Deal, Fannie Mae provided liquidity for mortgage originators – in other words, Fannie Mae enabled commercial banks, savings and loans, mortgage companies, state and local housing agencies and credit unions to have the funds to lend to people looking to purchase a home – and was the leading participant in the secondary mortgage market in the United States.

Fannie Mae held a virtual monopoly on this market for the next 30 years after its creation, until Freddie Mac was created to help break that monopoly in 1970. In 1968, Fannie Mae also ceased to be on federal books, as it was converted to a private corporation. Any government issued mortgages it held at that time were transferred over to the new Government National Mortgage Association (also known as Ginnie Mae).

Fannie Mae works by buying loans from mortgage originators like banks and mortgage firms. It then repackages the loans, converting them to mortgage backed securities (MBS) and then sells them on the secondary mortgage market. It guarantees that both the principal and interest will be paid to investors, regardless of whether or not the borrower repays the loan. Fannie Mae also can hold those purchased mortgages for its own portfolio. Fannie Mae itself receives no federal government aid directly, though it has been widely believed to be backed by the United States government, however implicitly. This idea would eventually be put to the test, and judging from events, appears to bear out.

By 2008, Fannie Mae guaranteed or owned about half of the $12 trillion mortgage market in the United States, along with the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). This put Fannie Mae in a position to be greatly affected by the subprime mortgage crisis the country began experiencing in 2007, which eventually led to the federal takeover of Fannie Mae and Freddie Mac in September of 2008. On September 7, 2008, the Federal Housing Finance Agency (FHFA) took conservatorship of both Fannie Mae and Freddie Mac. The FHFA has said there are no current plans to liquidate the company, but the authority the Treasury has to give funds to either corporation to keep them solvent is limited by laws governing how much debt the entire federal government is allowed to commit to.

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