Fannie Mae Overview

A government-sponsored company called Federal National Mortgage Association (Fannie Mae) gives the US housing and mortgage markets liquidity, stability, and affordability. For its mortgage portfolio, the association buys or acquires mortgage loans and securities. Through mortgage bankers, brokers, and other key players in the mortgage business, it offers home loans to consumers. In both the domestic and foreign capital markets, Fannie Mae primarily issues debt securities to finance its mortgage assets. It provides its goods and services to state and municipal housing finance organizations, commercial banks, credit unions, community banks, savings and loan associations, savings banks, and banking firms. It runs through regional offices in the US in Plano, Atlanta, Chicago, Los Angeles, and Washington. The headquarters of Fannie Mae are in Washington, DC. Fannie Mae was listed as the 33rd largest U.S. company by total revenue in the 2022 Fortune 500 rankings.

History

In the early 1900s, short-term mortgage loans with balloon payments made up the majority of housing loans in the United States. People lost their jobs and were unable to make mortgage payments during the Great Depression, which weakened the US housing market. An estimated 20 to 25% of the country’s mortgage debt was in default by 1933. Nearly 25% of homeowners in the United States lost their homes as a result of foreclosures. As part of Franklin Delano Roosevelt’s New Deal, the United States Congress amended the National Housing Act in 1938 to establish Fannie Mae as a means of addressing this issue. The organization, which was founded as the National Mortgage Association of Washington at first, had the specific goal of providing local banks with federal funds to finance home loans in an effort to increase home ownership rates and the supply of affordable housing. Banks and other loan originators were able to issue more housing loans as a result of Fannie Mae’s creation of a liquid secondary mortgage market, primarily through the acquisition of FHA-insured mortgages. The secondary mortgage market was dominated by Fannie Mae for the first thirty years after its establishment. The New Deal may have focused on the housing market for other reasons: A third of the unemployed in the country worked in the construction industry, and the government wanted to help them get back to work by giving them homes to build.

The Federal Loan Agency sold Fannie Mae to the Housing and Home Finance Agency in 1950 as a constituent unit. A change to the Federal National Mortgage Association Charter Act in 1954 made Fannie Mae a “mixed-ownership corporation,” which meant that the federal government held the preferred stock and private investors held the common stock. In 1968, it changed its status to a privately held corporation to get its operations and debt out of the federal budget.  The predecessor of Fannie Mae, also known as Fannie Mae, was divided into the current Fannie Mae and the Government National Mortgage Association in the 1968 alteration, which resulted from the Housing and Urban Development Act of 1968. (“Ginnie Mae”).

The Housing and Community Development Act of 1992 was signed into law by President George H.W. Bush in 1992. The Democratic Congress’ view that the GSEs “have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return” was reflected in the Act, which amended the charters of Fannie Mae and Freddie Mac. The GSEs had to meet “affordable housing goals” for the first time, which were set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. By 2007, the annual goal for low- and moderate-income mortgage purchases for each GSE had increased to 55% from 30% of the total number of financed housing units.

In 1999, the Clinton administration put pressure on Fannie Mae to increase the ratios of their loan portfolios in distressed inner city areas designated by the Community Reinvestment Act (CRA) of 1977 in order to expand mortgage loans to borrowers with low and moderate incomes.

Business

Fannie Mae generates revenue in part by taking out low-interest loans, reinvesting them in complete mortgage loans and mortgage-backed securities. Selling bonds allows it to borrow money from the debt markets, while buying complete loans from loan originators gives it access to liquidity. By establishing MBS that are either held or sold, it securitizes complete loans for the investment market after purchasing them.

Fannie Mae is required by law, as a GSE, to provide loan originators with liquidity regardless of the economic climate. Legally, it must disregard unfavorable market conditions that appear to be unprofitable. If no other buyers are available, it must acquire any available loans that meet its predetermined underwriting standards. Market participants believed that Fannie Mae corporate debt had a very high probability of being repaid due to the size, scale, and scope of the single-family residential and commercial residential markets in the United States. Because of market perception, Fannie Mae is able to borrow very cheaply in the debt markets. The rate at which it can “lend” and the rate at which it can borrow typically differ significantly. Alan Greenspan called this “The big, fat gap.” Fannie Mae’s mortgage portfolio had grown to more than $700 billion as of August 2008.

Additionally, a sizeable percentage of Fannie Mae’s income comes from the guaranty fees it receives in exchange for taking on the credit risk for the mortgage loans that form the basis of both its single-family Fannie Mae MBS and the single-family mortgage loans that are part of its retained portfolio. Investors, or buyers of Fannie Mae MBSs, agree to allow Fannie Mae keep this charge in return for taking on the credit risk, which is represented by Fannie Mae’s assurance that the scheduled principal and interest on the underlying loan will be paid even in the event of a borrower failure.

Fannie Mae Controversies

For its accounting procedures, Fannie Mae came under investigation in the latter part of 2004. On September 20, 2004, a report from the Office of Federal Housing Enterprise Oversight made claims of extensive accounting mistakes.

More than $1 billion was anticipated to be spent by Fannie Mae in 2006 alone to finish its internal audit and get it closer to compliance. According to Fannie Mae’s Annual Report on Form 10-K, the necessary restatement was done at a total cost of $6.3 billion in restated earnings, which was less expensive than the estimated $10.8 billion cost.

The scandal itself is not the first issue with Fannie Mae’s business and accounting procedures. Hearings on Fannie Mae were held on June 15, 2000, by the House Banking Subcommittee on Capital Markets, Securities, and Government-Sponsored Enterprises.

U.S. regulators charged former controller Leanne G. Spencer, chief executive Franklin Raines, chief financial officer J. Timothy Howard, and three others with 101 civil offenses on December 18, 2006. The three were charged with fannie mae earnings manipulation in order to maximize their incentives. The lawsuit sought to recover roughly $100 million in fines for the three defendants’ participation in the accounting scam as well as more than $115 million in bonuses that they collectively received from 1998 to 2004. A summary decision exonerated the trio in 2012 after 8 years of litigation, showing the government lacked sufficient evidence to support a conviction by a

Fannie Mae Financials

As of the fiscal year of 2021:

• Revenue: $ 29.9 billion
• Net income: $22.18 billion
• Total assets: $4.23 trillion
• Total equity: $ 47.36 billion