Fannie Mae
Fannie Mae, officially known as the Federal National Mortgage Association, is a prominent American government-sponsored enterprise established in 1938 to enhance housing finance services. Its primary role is to provide liquidity to the mortgage market by purchasing government-backed mortgages, which helps banks offer more accessible home financing options. Fannie Mae played a significant role in transforming the residential real estate landscape, particularly during the Great Depression, by introducing longer amortization periods and fixed interest rate mortgages, making home ownership feasible for a broader population.
Over the years, Fannie Mae expanded its operations, notably after World War II, by entering the market for VA-backed mortgages and transitioning from a government agency to a publicly traded entity in 1968. However, its involvement in higher-risk mortgage-backed securities contributed to significant challenges during the 2008 financial crisis, leading to substantial losses and a government bailout of $154 billion. Following this crisis, Fannie Mae has been subject to increased regulatory oversight and has focused on supporting lower-income homebuyers while addressing past financial missteps. As one of the key players in U.S. housing finance, Fannie Mae's activities continue to impact mortgage availability and affordability in the American housing market.
Fannie Mae
Fannie Mae is the informal name for the Federal National Mortgage Association (FNMA), an American government-sponsored enterprise that provides housing finance services. Established in 1938, Fannie Mae's initial purpose was to supply banks with government money for financing mortgages. Its creation marked a major shift in the way residential real estate purchases were financed, making home ownership more attainable. Fannie Mae also brought about the creation of a secondary market for mortgage-backed securities.
Background and Founding
Prior to the Great Depression, housing finance was the exclusive domain of private enterprise in the United States, and most mortgage loans came with terms and conditions that made it difficult for lower-class and middle-class people to purchase homes. Down payments were high, typically in the range of 50 percent of the property's total value. Amortization periods were short by today's standards, usually lasting ten years or less. Most mortgages also required high balloon payments due at the end of the loan term.
During the Great Depression, the American housing market plunged into a crisis. By 1933, an estimated 20 to 25 percent of all mortgages in the country were in default, leaving banks with critical cash shortages. The federal government, under the direction of President Franklin D. Roosevelt, introduced several measures designed to slow mortgage default rates. New mortgage terms featuring longer amortization periods and fixed interest rates were introduced. This reduced the overall number of mortgage foreclosures and made home ownership attainable to more people.
Fannie Mae was formally created in 1938 through an amendment of the National Housing Act of 1934. According to the terms of the National Housing Act, government-backed mortgage insurance was created to reduce the risks faced by mortgage lenders. The 1938 amendment that established Fannie Mae also created a secondary market for mortgage-backed securities; Fannie Mae's mandate was to buy, hold, and sell federally insured mortgage loans. This introduced a large influx of cash to the real estate market, which enabled lenders to more easily finance home loans.
The Evolution of Fannie Mae
During World War II, the US government passed the Servicemen's Readjustment Act, commonly known as the G.I. Bill. One of its provisions created a mortgage insurance program for war veterans, administered by the Veterans Administration (VA). Through this program, veterans gained access to affordable mortgages with lengthy amortization periods, and in 1948, Fannie Mae began to buy, hold, and sell VA-backed mortgages.
With Fannie Mae doing unprecedented business as the result of its entry into the VA-backed secondary mortgage market, the enterprise underwent a number of organizational changes during the 1950s and 1960s. In 1954, Fannie Mae changed from an agency of the federal government into an enterprise with a combination of public and private ownership. Fannie Mae also became exempt from all taxes, except property taxes.
Meanwhile, Fannie Mae continued to grow, emerging as one of the most important financial institutions in the US. In 1968, with the federal government facing budget problems because of its lengthy and expensive Vietnam War campaign, Fannie Mae was transformed into a wholly investor-owned enterprise. This allowed the government to eliminate Fannie Mae's massive mortgage debt from its accounting practices but left Fannie Mae with a monopoly over the secondary mortgage market. As monopolies are restricted under US antitrust laws, Fannie Mae's sibling company, Freddie Mac, formally called the Federal Home Loan Mortgage Corporation, was created in 1970.
During the 1970s and early 1980s, unstable market conditions caused Fannie Mae to suffer major financial losses. With the US in a recession marked by high inflation, interest rates soared, and Fannie Mae's holdings, most of which were financed with short-term monetary instruments, were devalued. To keep Fannie Mae from falling into a serious crisis, the government extended new tax benefits and forbearance measures to the company. However, the American savings and loan industry continued experiencing difficulties throughout the decade, though Freddie Mac's financial crisis was worse than Fannie Mae's. Nevertheless, critics began to question Fannie Mae's relative lack of regulatory oversight. In 1992, Congress passed legislation known as the Federal Housing Enterprises Financial Safety and Soundness Act, which marked the establishment of the Office of Federal Housing Enterprise Oversight (OFHEO). The new body regulated Fannie Mae and Freddie Mac through regular business examinations. The legislation also introduced significant changes to Fannie Mae's mandate, turning it into a body focused on financing real estate purchases among lower-income citizens.
Fannie Mae and the 2008 Subprime Mortgage Crisis
In the early to mid-2000s, Fannie Mae began to purchase higher-risk mortgage-backed securities, including mortgages with high debt-to-income and loan-to-value metrics. Fannie Mae also entered the secondary subprime mortgage market, exposing the enterprise to additional perils. In 2007 and 2008, the American real estate market experienced a sharp decline, marked by plunging property values and a major rise in loan default and delinquency rates. Investor confidence in Fannie Mae and Freddie Mac reached all-time lows, and the survival of the enterprises was threatened; at one point, Fannie Mae's stock price suffered a 90 percent year-over-year loss. Subsequent investigations revealed that Fannie Mae's risk exposure had long been much higher than widely believed, and in 2010, both Fannie Mae and Freddie Mac were delisted from the New York Stock Exchange.
Several courses of action were considered to prevent Fannie Mae from collapsing, including returning the enterprise to its original status as a department of the US federal government. Legislators eventually solved the crisis by offering Fannie Mae and Freddie Mac taxpayer-funded financial bailout packages valued at $154 billion. Fannie Mae made amends by paying a $121.1 billion dividend to the US Treasury in 2014. Meanwhile, accounting scandals and allegations of wrongdoing began to surface, with an employee in Fannie Mae's foreclosure department claiming that private real estate brokers routinely bribed Fannie Mae employees to disclose confidential foreclosure listing information.
The 2010s and 2020s
From the inception of the conservatorship through the end of 2019, Fannie Mae and Freddie Mac paid the US Treasury dividends totaling over $301 billion. With this progress, plans began to remove the conservatorship. In September 2019, both organizations were permitted by the Federal Housing Finance Agency and the Treasury to build capital reserves and retain some of their earnings.
During the COVID-19 pandemic, the government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to stimulate the American economy and support struggling individuals and businesses. The CARES Act included protections for Fannie Mae and Freddie Mac mortgage holders against foreclosures. The CARES Act placed a temporary moratorium on eviction filings and provided certain other protections to tenants of federally assisted rental properties. This moratorium was eventually extended through August 26, 2021. CARES Act funds expired on September 30, 2021.
Bibliography
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