Fannie Mae

Fannie Mae: A Giant in the US Housing Market

Imagine a giant in the housing market, one that has been shaping the landscape for over eight decades. That’s Fannie Mae, the Federal National Mortgage Association. Founded during the Great Depression as part of President Franklin D. Roosevelt’s New Deal, its purpose was to expand the secondary mortgage market and make home ownership more accessible. But what exactly does this mean? Essentially, it means that by securitizing mortgages, Fannie Mae allows lenders to reinvest their assets into more lending, thus increasing the number of lenders in the mortgage market.

Fannie Mae’s journey is a tale of both success and controversy. With over $4.3 trillion in assets, it became the largest company in the US and fifth-largest globally by 2015. But its path to this position was not without challenges. From its initial charter as the National Mortgage Association of Washington in 1938, through its acquisition by the Housing and Home Finance Agency in 1950, conversion into a publicly traded corporation in 1968, and split into Fannie Mae and Freddie Mac (Federal Home Loan Mortgage Corporation) in 1970, each step was pivotal.

Was this split necessary? Or did it merely set the stage for future controversies?

The Early Years: A Monopoly and Beyond

In its early years, Fannie Mae held a monopoly over the secondary mortgage market. But in 1968, Ginnie Mae issued the first mortgage pass-through security, followed by Freddie Mac’s entry in 1971. This marked the beginning of competition within the government-sponsored enterprise (GSE) sector.

Was this competition healthy for the housing market? Or did it lead to a race to the bottom?

The Subprime Crisis: A Turning Point

In the late 1990s, Fannie Mae expanded its mortgage loans to low and moderate-income borrowers. This expansion increased risk but also led to anti-predatory lending rules in 2000. However, these rules were later dropped in 2004, allowing for a flood of high-risk loans.

Was this the right decision? Or did it contribute to the subprime mortgage crisis?

The Financial Crisis: A Wake-Up Call

The early 2000s saw Fannie Mae sounding concerns about ‘layered-risk’ lending. However, these warnings were largely ignored. By 2008, the subprime mortgage crisis had led to a shift away from regulated GSEs and toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits.

Was this shift necessary? Or did it exacerbate the financial crisis?

The Government’s Intervention

In July 2008, Fannie Mae and Freddie Mac were seized by the government due to their massive involvement in the US housing market and potential financial instability. The government intervened by issuing new stock to the Treasury.

Was this intervention timely? Or did it come too late?

The Future of Fannie Mae

Fannie Mae continues to make money through borrowing at low rates, reinvesting into whole mortgage loans and securities, purchasing whole loans, and providing liquidity to loan originators. It sets guidelines for ‘conforming’ loans it will accept for purchase, including an automated underwriting system (AUS) tool called Desktop Underwriter (DU).

Where does Fannie Mae go from here? Will it continue to play a pivotal role in the US housing market?

Conclusion

Fannie Mae’s journey is a complex one, filled with both successes and controversies. From its founding during the Great Depression to its current status as a key player in the US housing market, Fannie Mae has faced numerous challenges. But through it all, its role remains crucial. Will it continue to shape the future of home ownership? Only time will tell.