If you have a home equity loan or variable mortgage, pay attention to the Fed.
What is Fannie Mae?
The Federal National Mortgage Association, known as Fannie Mae, is a government-sponsored enterprise (GSE) that purchases mortgages from commercial lenders in order to provide the lenders with liquidity. In what’s called “securitization,” Fannie Mae, as well as its brother institution Freddie Mac, bundles mortgages it owns and sells them to investors. Fannie Mae was created as a government agency in 1938, but it became a publicly traded company thirty years later.
A mortgage is a loan of money from a bank to someone who is buying a home. Virtually all banks write mortgages, and borrowers make not only regular payments against the loan amount but also interest payments to the bank to cover its costs.
Fannie Mae was established as part of President Franklin D. Roosevelt’s New Deal program to provide liquid cash to banks that issue mortgages. Along with Freddie Mac, which was established in 1970, Fannie Mae buys mortgages from banks and makes sure the banks don’t run out of money, and, in turn, can offer more mortgages. The company also guarantees millions of mortgages throughout the country, helping to reduce the down payment and credit requirements for low- and middle-income families.
Fannie Mae doesn’t write mortgages itself, but it does package them together and sell them to investors in what’s called a mortgage-backed security, which entitles the investor to collect on the interest payments instead of the original creditor. The subprime mortgage crisis, which precipitated the recession of 2007-09, was in part caused by the failure of mortgage-backed securities consisting of mortgages issued to people with limited means to pay them back. However, most economists agree that Fannie Mae and Freddie Mac held little to no responsibility for the crash and merely contributed to it by purchasing the subprime mortgages.
At the height of the financial crisis, Fannie Mae and Freddie Mac backed so many mortgages that they had to be bailed out by the U.S. government. Although it’s still owned by its shareholders, Fannie Mae is now controlled by a conservatorship of the Federal Housing Finance Agency. As part of its bailout agreement, Fannie Mae pays its profits to the U.S. Treasury as dividends instead of paying them to its shareholders.
As of 2017, Fannie Mae and Freddie Mac are allowed to guarantee mortgages of up to $424,100 or as high as $636,150 in Alaska, Hawaii, and some territories.
How healthy is your mortgage? Use Bankrate’s mortgage calculator to see how much you’ll owe.
Fannie Mae example
The Iron Bank has written 5,000 mortgages and about 4,000 of them are in good standing. However, the interest payments it collects aren’t high enough to give it the liquidity it wants. Fannie Mae offers to buy the 4,000 good mortgages for $1 billion, money that the Iron Bank can use to write even more mortgages and provide Americans with affordable housing.