Federal National Mortgage Association

Identification Secondary-mortgage-market financial institution

Also known as Fannie Mae

Date Established on February 10, 1938

The establishment of Fannie Mae gave birth to the secondary mortgage market. It has played a major role in making mortgage money available to home buyers in the United States.

President Franklin D. Roosevelt and the U.S. Congress created the Federal National Mortgage Association under the umbrella of the New Deal in 1938. The agency was established in response to a financial situation that was paralyzing the real estate marketplace and thereby further depressing the national economy.

By the mid-1930’s unemployment and the resulting financial strain on families had pushed so many home mortgages into foreclosure that lending institutions were finding themselves short of the funds needed to continue making mortgage loans to prospective home buyers. From 1932 to 1936, bank loans dropped by almost $11 billion. The lack of available money from lenders dried up both home resales and new building starts.

In an effort to stimulate lending, Fannie Mae was given the ability to buy Federal Housing Administration-insured mortgages from the lenders who originally wrote the loans. Federal money was thus pumped into the economy through payment to the banks in return for the mortgages. In turn, the banks would have more cash to lend out. This procedure was justified as an expansion of the flow of mortgage money and therefore beneficial to the nation as a whole. It was done in an attempt to raise the ratio of home ownership across the nation and to stimulate the availability of affordable housing.

The business of selling mortgages to a third party is known as the secondary mortgage market. The Federal National Mortgage Association was the first financial organization to be created exclusively for this function. It began with only $1 billion in mortgage purchasing power, but it contributed to the realization of the American Dream for a whole generation of low- and middle-income citizens. Americans could buy homes with minimal down payments because banks were stimulated to lend when the Federal Housing Authority was willing to insure the loans. Furthermore, with Fannie Mae standing by, bankers knew that the loans could be sold quickly to a third party. In 1944, Fannie Mae’s mortgage purchasing authority was expanded to include loans guaranteed by the Veterans Administration; it expanded even more in the following years.

For thirty years Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States. Not until 1968 was it privatized by President Lyndon B. Johnson and removed from the national budget. At that point, it was designated a government-sponsored enterprise (GSE). Shares in the company were sold to private investors.

As the first financial institution in the secondary mortgage market, Fannie Mae forever changed the nature of lending in the United States. Without competition, it held unchecked power in the financial marketplace until another similar GSE, Freddie Mac, was created in 1970. Together they held as much as 90 percent of the nation’s secondary mortgage market.

Impact

The creation of the Federal National Mortgage Association not only stimulated the financial marketplace of the 1930’s but also established lending practices that continued and expanded into the twenty-first century. Bankers were attracted to the prospect of writing long-term mortgages because they did not have to hold them for the long term. Mortgage loans looked less risky to lenders and therefore became more readily available to borrowers.

The expanding power of the secondary mortgage market has resulted, however, in tremendous financial complexity. By the end of the twentieth century, mortgages were bought and “bundled,” sometimes with dissimilar properties grouped together, and the resulting packages were sold as mortgage-backed securities on the stock exchange. Often the trades were made without buyers’ knowledge of the components of the bundle. Lack of federal supervision and accountability made Fannie Mae a significant contributor to the financial crisis of 2008.

Bibliography

Calder, Lendol. Financing the American Dream: A Cultural History of Consumer Credit. Princeton, N.J.: Princeton University Press, 1999.

Frame, W. Scott. “The 2008 Federal Intervention to Stabilize Fannie Mae and Freddie Mac.” Atlanta, Ga.: Federal Reserve Bank of Atlanta, 2009.

Wallison, Peter, Nationalizing Mortgage Risk: The Growth of Fannie Mae and Freddie Mac. Washington, D.C.: AEI Press, 2000.