Fannie Mae

Fannie Mae (FNMA), federally chartered private corporation created as a federal agency by the U.S. Congress in 1938 to ensure adequate liquidity in the mortgage market regardless of economic conditions. It is one of several government-sponsored enterprises (GSEs) established since the early 20th century to help reduce the cost of credit to various borrowing sectors of the economy. Its headquarters are in Washington, D.C.

The Federal National Mortgage Association, commonly known as Fannie Mae, was established as part of Pres. Franklin D. Roosevelt’s New Deal plan to restructure the economy in the wake of the Great Depression. Fannie Mae was designed to guarantee the availability of affordable housing by ensuring that mortgage bankers and other lenders possessed sufficient funds to lend to home buyers at low rates. It functioned not only to aid prospective home buyers who could not afford high-rate mortgages but also to help existing home owners refinance their mortgages to avoid foreclosure.

Fannie Mae purchased loans insured by the Federal Housing Administration (FHA) and later by the Veterans Administration (VA) from mortgage originators, including banks and nonbank mortgage firms. It then either held the loans for its own portfolio or sold them to investors in the new secondary mortgage market (the market for the purchase and sale of mortgage loans). Mortgage originators used the funds they obtained from the sale of mortgages to Fannie Mae to issue new loans, thus replenishing the funds available to home buyers at a lower cost.

From 1938 to 1968 Fannie Mae was by far the largest buyer and seller of government-insured mortgages. Congress took steps to increase competition in the secondary mortgage market by privatizing Fannie Mae in 1968 and by creating a similar GSE, the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, in 1970. Both Fannie Mae and Freddie Mac were authorized to buy and sell conventional mortgages as well as those insured by the FHA or VA, which were now guaranteed by a new Government National Mortgage Association, better known as Ginnie Mae. To attract new investors to the secondary mortgage market, in 1981 Fannie Mae began selling mortgage-backed securities (securities collateralized by cash flows from pools of mortgage loans) with a guarantee of timely payment of principal and interest, whether or not the original borrowers paid.

Fannie Mae and Freddie Mac together exercised a virtual monopoly on the secondary mortgage market until the 1990s, when increasing federal regulation of the corporations and new legislation allowing mergers between banks and other financial companies resulted in greater competition from conventional firms. In 1989 Freddie Mac was given an independent board of directors but was subjected to oversight by the U.S. Department of Housing and Urban Development (HUD). HUD and its Office of Federal Housing Enterprise Oversight assumed additional regulatory responsibilities for both Freddie Mac and Fannie Mae in 1992. In 2007 the Federal Housing Reform Act transferred these responsibilities to the new Federal Housing Finance Agency (FHFA).

Both Fannie Mae and Freddie Mac suffered heavy losses in 2007–08 during the subprime mortgage crisis, a severe contraction of liquidity in credit markets worldwide brought about by drastic declines in the value of securities backed by subprime mortgage loans. To prevent further losses that would worsen the crisis and damage the U.S. economy, both corporations were placed under the conservatorship of the U.S. government in September 2008, though neither was legally entitled to any direct government backing, insurance, or support. As part of this takeover, the government planned to provide billions of dollars to the corporations in the form of investments and loans.