Jane Dotson
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government-sponsored enterprise (GSE) that was established in 1938 as part of Franklin Delano Roosevelt's New Deal. The purpose of the organisation was to provide local banks with federal money to finance home loans, thereby increasing home ownership and the availability of affordable housing. Fannie Mae and its brother organisation Freddie Mac, are unique in their company structure, with their close relationship to the federal government providing them with lower borrowing costs and more investor confidence. However, this government backing also comes with strict oversight. So, is Fannie Mae federally insured?
| Characteristics | Values |
|---|---|
| Type of company | Government-sponsored enterprise |
| Date founded | 1938 |
| Purpose | To expand the secondary mortgage market by securitizing mortgage loans in the form of mortgage-backed securities (MBS) |
| Relationship with the federal government | Close relationship with the federal government, allowing access to lower borrowing costs and more investor confidence due to an "implicit guarantee" |
| Government intervention | The federal government helped Fannie Mae recover from financial losses during the late 1970s and early 1980s inflation and recessions with regulatory forbearance and tax benefits |
| Government oversight | The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 created the HUD's Office of Federal Housing Enterprise Oversight (OFHEO), now the Federal Housing Finance Agency (FHFA), which conducts routine safety and soundness examinations and enforces necessary changes |
| Financial backstop | Provided by the U.S. federal government with a line of credit from the U.S. Treasury for $2.25 billion |
| Date of federal supervision | September 2008 |
| Recent assets | Over $4.3 trillion in assets as of 2024 |
| Global ranking | Fifth largest company in the world by assets as of 2024 |
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What You'll Learn
Fannie Mae's government ties
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government-sponsored enterprise (GSE). It was founded in 1938 during the Great Depression as part of Franklin Delano Roosevelt's New Deal. Its purpose was to provide local banks with federal money to finance home loans, thereby increasing home ownership and the availability of affordable housing.
Fannie Mae's close relationship with the federal government gives it access to lower borrowing costs and more investor confidence due to an "implicit guarantee". This means that many assume the government will intervene before letting the GSE default, even though there is no explicit guarantee. For example, during the late 1970s and early 1980s inflation and recessions, the federal government helped Fannie Mae recover from its financial losses with regulatory forbearance and tax benefits.
Fannie Mae's congressional charter made it a Government Sponsored Enterprise (GSE). Although it is technically private, it has ties to the U.S. federal government that are thought to provide a financial backstop, with a line of credit from the U.S. Treasury for $2.25 billion. In 2008, during the financial crisis, Fannie Mae was placed under the direct supervision of the federal government.
Fannie Mae and its brother organisation Freddie Mac (Federal Home Loan Mortgage Corporation) purchase mortgages on the secondary market and pool them into mortgage-backed securities (MBS). They then sell these to investors, guaranteeing the principal and interest payments. This injects liquidity into the mortgage market. In 2017, Fannie Mae and Freddie Mac securitized and guaranteed about 46% of mortgage originations.
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The Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is one of two government-sponsored entities, along with Fannie Mae. According to the Federal Housing Finance Agency, Congress created both Freddie Mac and Fannie Mae to provide liquidity, stability and affordability in the U.S. mortgage market. They do this by purchasing mortgages from lenders and either holding these loans in their own portfolios or packaging them into mortgage-backed securities (MBS) that they sell to investors. This process helps to keep mortgage capital flowing by ensuring lenders can provide financing options to qualified borrowers.
FHLMC's Single-Family Division purchases mortgage loans from lenders, allowing them to continue lending to qualified borrowers. Its Multifamily Division purchases loans on apartment buildings from a network of Optigo® lenders, bundling these loans into securities for investors, ensuring liquidity, stability and affordability in the market.
FHLMC does not receive direct federal government aid. However, the corporation and the securities it issues are thought to benefit from government subsidies. The Congressional Budget Office writes:
> "There have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds, the government provides considerable unpriced benefits to the enterprises. Government-sponsored enterprises are costly to the government and taxpayers. The benefit is currently worth $6.5 billion annually."
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The 1970s and 1980s financial crisis
The financial crisis of the 1970s and 1980s was characterised by inflation and recessions, which caused significant financial losses for Fannie Mae. During this period, the federal government stepped in to aid Fannie Mae's recovery, offering regulatory forbearance and tax benefits.
Fannie Mae, alongside Freddie Mac, is a government-sponsored enterprise (GSE). These GSEs are unique in their company structure, benefiting from a close relationship with the federal government. This connection grants them access to lower borrowing costs and greater investor confidence due to an "implicit guarantee" of government support. This implicit guarantee allowed them to expand further than their competitors.
In the early 1970s, the Federal Home Loan Mortgage Corporation (FHLMC) or "Freddie Mac" was established, expanding the secondary mortgage market. This expansion continued into the 1980s, with powerful activist groups demanding that banks reduce lending standards, such as the reliance on creditworthiness and higher down payments. As a result, GSEs like Fannie Mae and Freddie Mac found it increasingly challenging to locate creditworthy borrowers, prompting them to dive into the subprime mortgage market and reduce their underwriting standards.
The development of mortgage-backed securities in the 1980s brought global capital into the US housing industry. However, it also contributed to the financial crisis, as housing prices plummeted, delinquencies rose, and government-sponsored enterprises suffered significant losses on their investment portfolios and mortgage-backed security guarantees.
The crisis resulted in heightened government oversight, with the Federal Housing Finance Agency conducting routine safety and soundness examinations of the GSEs. Despite the challenges, Fannie Mae recovered, returning to profitability in 2012 and fully repaying the funds received during the crisis by 2014.
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The Housing and Community Development Act of 1992
The Act amended the charter of Fannie Mae and Freddie Mac, two government-sponsored enterprises that provide liquidity, stability, and affordability to the mortgage market. The amendments reflected the view that these enterprises had an "affirmative obligation to facilitate" certain housing goals.
Additionally, the Act increased the aggregate budget authority for low-income housing for fiscal years 1993 and 1994, extended ceiling rents, and excluded certain childcare and excessive travel expenses from the calculation of adjusted income. It also allowed the Secretary of Housing and Urban Development to issue public and Section 8 housing tenant preference rules.
The Act provided funding for the rehabilitation of sub-standard public housing and started as a 10-year research demonstration program that offered voucher rental assistance to families trying to find housing in low-income neighborhoods.
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The Federal Housing Finance Agency (FHFA)
The FHFA is responsible for the supervision, regulation, and housing mission oversight of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System, which includes the 11 Federal Home Loan Banks (FHLBanks) and the Office of Finance (OF). The Agency's mission is to ensure that these enterprises operate safely and serve as a reliable source of liquidity and funding for housing finance and community investment.
The FHFA has taken various initiatives to support its mission. For example, it established the Suspended Counterparty Program to address the risk to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks presented by individuals and entities with a history of fraud or financial misconduct. Additionally, the FHFA initiated litigation against 18 financial institutions involving allegations of securities law violations and fraud in the sale of private-label securities (PLS) to Fannie Mae and Freddie Mac.
The FHFA also plays a role in monitoring and reporting on house price changes. It has developed the FHFA House Price Index® (FHFA HPI®), which measures changes in single-family home values based on data from all 50 states and over 400 American cities. This index provides valuable insights into the housing market and helps track its performance over time.
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Frequently asked questions
Yes, Fannie Mae is a government-sponsored enterprise (GSE).
Founded in 1938 during the Great Depression, Fannie Mae was established to provide local banks with federal money to finance home loans, thereby increasing home ownership and the availability of affordable housing.
Fannie Mae has a close relationship with the federal government, which gives it access to lower borrowing costs and more investor confidence due to an "implicit guarantee". The federal government has intervened in the past to prevent the company from defaulting.
The federal government authorised Fannie Mae to purchase conventional loans not insured by the FHA, VA or FmHA. In 2008, the federal government placed Fannie Mae under direct supervision, and it currently has a remaining funding commitment through senior preferred stock purchase agreements, which provide financial support to the enterprise.
