The Foibles of Fannie Mae

What Is Fannie Mae, and How Could It Affect Your Home Loan?

Fannie Mae was created in 1938, but its current incarnation as a government-sponsored enterprise (GSE) didn’t begin until 1968. It is a financial institution which purchases mortgage-backed securities and provides guarantees on loans owned by others. It has since its inception been a major factor in the home loan market, but its role has expanded greatly since the current real estate malaise struck.

The reason for this newfound importance lies in the fact that it is a GSE, and so, unlike other financial institutions, its decisions are not solely market based. Indeed, since 1999 it has played a major role in creating loan availability for lower-income people in distressed areas, such as inner cities. Indeed, they are the largest entity enabling the subprime loans that have received so much press attention for their role in the current calamities.

To be clear, Fannie Mae is not itself a lender to individuals. The way that Fannie Mae supports lending is instead by either, as mentioned previously, buying the loans from the original lenders, or selling guarantees on loans if held by others. These guarantees shift the risk onto Fannie Mae. In case of borrower default the difference between whatever money the bank received from foreclosing the home plus any payments made and the money it would have received, principal plus interest, had the borrower paid in full, will be paid to the mortgage-holder.

For awhile, this model actually made Fannie Mae money, but with the subprime mortgage meltdown, it went deep into the red, and the government stepped in and took even tighter control over its workings. That said, despite its difficulties Fannie Mae has stayed in business, and indeed is at this point the single biggest mortgage-based financial entity on the market today. Indeed, Fannie Mae now on one way or another supports almost all categories of mortgages, even jumbo loans (loans over $417,000), which they did not in the past.

What does all this mean to you? It is quite possible that, without the presence of Fannie Mae and its companion institution Freddie Mac, home loan lending in the US might have ground to a standstill. It is only the fact that crisis-staggered lenders have institutions to sell or otherwise transfer risk to that convinces them to lend at all. Lending has, despite the presence of Fannie Mae, slowed down tremendously, although this is also affected by the hesitance of a newly cautious public to borrow.

The presence of Fannie Mae keeps loans available and relatively cheap. The future of the institution, however, is uncertain. On September 7, 2008, Fannie Mae and Freddie Mac were placed under conservatorship of the US government to prevent what otherwise was an almost certain collapse. With a mortgage portfolio of over $700 billion, Fannie Mae lost a catastrophic amount of money when the housing bubble popped. Indeed, because of new and very loose accounting rules, just how much value their assets lost is still unknown. Still, at this point, as it is under conservatorship, the federal government can allocate as much money as it wants to stabilize Fannie Mae, so for the time being, it seems that Fannie Mae will be around for some time, keeping what activity there is in the home loan market alive.

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