Fannie Mae is a government-backed mortgage lending company in the US that buys and underwrites banks’ existing mortgages to free up money for banks to continue lending. It was created in 1938 and split in two in 1968, with a third player, Freddie Mac, created in 1970. Both entities operate within strict lending parameters and were placed into government conservatorship in 2008 due to the subprime mortgage crisis.
The National National Mortgage Association, colloquially known as Fannie Mae or FNMA, is a government-backed, Congress-sanctioned mortgage lending company in the United States. The primary goal of the National Mortgage Association is to ensure that home buyers in the United States have access to affordable mortgage rates. The association does not issue mortgages itself, but rather buys and underwrites banks’ existing mortgages, freeing up money for banks to continue lending. The association was created in 1938 during the Great Depression as a wholly governmental entity. Its leadership and ownership structure has undergone several changes since then: it was once fully independent, but as of 2010 it was held under government conservatorship.
Since the creation of the Federal National Mortgage Association, mortgages have generally become more available and affordable to American families. The association has made this possible by backing and underwriting single-family, multi-family and equity mortgages from banks across the country. In essence, the association buys loans that banks have already made to consumers. This gives banks more money to lend to new home buyers and also backs the loans with interest payments and principal guarantees from the association.
The association was federally owned when it was created in 1938. At the time, the government itself backed the mortgages the association purchased. Several years later, in 1968, the association split in two. A new National Mortgage Association was created as a private, shareholder-owned entity, and a National Government Mortgage Association was created as a wholly government organization primarily charged with supporting federally insured loan programs. The National Government Mortgage Association is often known as Ginnie Mae.
A third player came on the scene in 1970, when Congress authorized the creation of the Federal Home Mortgage Loan Corporation, generally known as Freddie Mac, to mirror and compete with the Federal Mortgage Association. The idea was that two independent, government-responsible mortgage lenders would create healthy competition in the marketplace and help stabilize the availability of affordable housing and home loans across the United States. The Federal National Mortgage Association has always been larger than the Federal Home Loan Mortgage Corporation, but the two are, as expected, competitors in the marketplace.
Although independent, both entities were required to operate within a set of strict lending parameters. Most importantly, associations can only purchase and guarantee “conforming” loans. The Office of Federal Housing Business Oversight determines if a loan is considered “compliant.” The calculation typically focuses on the borrower’s credit history, the length of the loan, and the likelihood of timely repayment. Initially, a loan had to be relatively strict and secure to pass as conforming. Fast forward to 2003, however, the standard loosened.
Faced with increasing competition from outside lenders who were making major mortgages and loans for little if anything, the National Mortgage Association and the Federal Mortgage Loan Corporation were allowed to accept similar loans as conforming. 2004 marked the beginning of the subprime mortgage crisis in the United States. In this crisis, borrowers became increasingly unable to pay their mortgages and began to default. The lending banks, in turn, turned to the associations to honor their guarantees. The volume of defaults and the number of guarantee payments threatened to break the associations. In 2008, the federal government intervened again, placing the Federal National Mortgage Association and the Federal Home Mortgage Loan Corporation into government conservatorship.
The conservatorship is like a bailout in that the federal government has agreed to use tax dollars to help associations make refunds they can’t afford. In this way, the associations will be able to continue doing business, despite their heavy financial losses. As of 2010, the associations remain independent; conservatorship affects some of their financial decisions, but it does not cost them their autonomy.
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