Fannie Mae

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Definition: Fannie Mae


Quick Summary of Fannie Mae


Fannie Mae, or the Federal National Mortgage Association, is one of the primary purchasers of eligible home loans from issuers. Fannie Mae securitizes these loans into mortgage-backed securities, and sells the securities to investors. Congress created Fannie Mae in 1938 to establish a secondary market for government-backed mortgages. Fannie Mae became a private company in 1968, and it is traded on the New York Stock Exchange. Fannie Mae is still federally charted with a mission to provide funding for affordable housing and is subject to oversight by the Department of Housing and Urban Development. Because of this, some people wrongly assume Fannie Mae is federally backed, and thus Fannie Mae is able to borrow at slightly lower rates. However, Fannie Mae neither receives support from nor has its securities guaranteed by the US government.



Full Definition of Fannie Mae


The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government-sponsored enterprise (GSE) sponsored by the United States government. As a GSE, it is a privately-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the U.S. government, nor do the securities it issues benefit from any explicit government guarantee or protection.

This secondary mortgage market helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases. The name “Fannie Mae” is a creative acronym-portmanteau of the company’s full name that has been adopted officially for ease of identification.

History

Fannie Mae was originally founded as a government agency in 1938 as part of Franklin Delano Roosevelt’s New Deal to provide liquidity to the mortgage market. For the next 30 years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States.

In 1968, to help balance the federal budget, Fannie Mae was converted into a private corporation. Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). Fannie Mae is now the ninth-largest business in the world according to Forbes’ Rich List of top 1,000 businesses.

Business

Fannie Mae’s primary method for making money is by charging a guarantee fee on loans that they have securitized into mortgage-backed security bonds. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk, that is, Fannie Mae’s guarantee that the principal and interest on the underlying loan will be paid regardless of whether the borrower actually repays.

Fannie Mae receives no direct government funding or backing, and it has looser restrictions placed on its activities than normal financial institutions. For example, it is allowed to sell mortgage-backed securities with half as much capital backing them up as would be required of other financial institutions.

Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Despite this, there is a wide misperception that these notes carry an implied government guarantee, and the vast majority of investors believe that the government would prevent them from defaulting on their debt.

Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae.

Alan Greenspan and Ben Bernanke have spoken publicly in favour of greater regulation of the GSEs, due to the size of their holdings and the public belief in a government guarantee that does not exist.

Conforming Loans

Fannie Mae (along with Freddie Mac) annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a non-conforming jumbo loan. The GSEs only buy loans that are conforming, to repackage into the secondary market, making the demand for non-conforming loans lower. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a per cent.) The conforming loan limit is 50 per cent higher in Alaska, Hawaii, Guam and the US Virgin Islands.

Accounting scandal

In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report on September 20, 2004, alleging widespread accounting errors, including shifting of losses so senior executives could earn bonuses.

Fannie Mae is the second-largest U.S. financial institution after Citigroup Inc. yet hasn’t filed an earnings statement since late 2004, though required to do so by SEC regulations and New York Stock Exchange listing standards. Fannie Mae expected to spend more than $1 billion in 2006 alone to complete its internal audit and bring it closer to compliance. The anticipated restatement was estimated at $10.8 billion, however, after review resulted in $6.3 billion in restated earnings as listed in Fannie Mae’s Annual Report on Form 10-K.

Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On June 15, 2000, the House Banking Subcommittee On Capital Markets, Securities And Government Sponsored Enterprises held hearings on Fannie Mae.

On December 18, 2006, U.S. regulators filed 101 civil charges against chief executive Franklin Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer. The three are accused of manipulating Fannie Mae earnings to maximize their bonuses. The lawsuit seeks to recoup more than $115 million in bonus payments, collectively accrued by the trio from 1998–2004, and about $100 million in penalties for their involvement in the accounting scandal.


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Definition Sources


Definitions for Fannie Mae are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 23rd April, 2020 | 0 Views.