Fannie Mae, the most commonly used nickname for the Federal National Mortgage Association, is a government-sponsored enterprise, or GSE, with the mission of bringing money, stability and affordability to the U.S. housing marketplace. It does so by purchasing mortgages from banks and then promoting them, largely through a process called securitizing. Once the mortgages have been bought, banks are freed up to make more loans.
In the 1930s, mortgages had brief terms with balloon payments. When the payments came due, the creditors went to refinance. Throughout the Great Depression, however, banks refused to lend, leading to foreclosures, even by creditors who were willing and able to make payments. President Franklin Roosevelt's New Deal included creation of the Federal Housing Administration, or FHA, and Fannie Mae. The FHA first created and afterwards insured fully amortized fixed-rate mortgages. Fannie Mae bought FHA loans free bank up funds so that the creditors could make more loans. In 1968, Fannie Mae became.
Fannie Mae buys mortgages from banks within a couple ways. Frequently the bank keeps the loan servicing; lots of borrowers never even know their loans are owned by Fannie Mae. In 1 way, Fannie Mae securitizes mortgages, or turns their own worth into securities, which are an investment item. The GSE subsequently sells the securities, often known as a mortgaged-backed safety, or MBS, to investors all around the world. In another method, the creditor itself securitizes the mortgages and sells them to Fannie Mae. MBS can be resold many times over, occasionally carrying the financing of Fannie Mae's warranty and occasionally not.
The basic idea behind Fannie Mae–to provide a government-supported entity to buy mortgages and so free up funds for banks to make more mortgages–is a simple and sound concept. Together with all the FHA, Fannie Mae and Freddie Mac (Federal Home Loan Mortgage Corp.) altered the homeownership rate in this nation from 44 percent in 1940 to over 66 percent in 2000.
The complexity of the MBS blossomed throughout precisely the exact same time the housing bubble grown. An MBS is a reference to an investment item. It can actually be turned into hundreds of different kinds of goods, each with various titles and structures. When the MBS became sufficiently complicated, assessing the risk related to the product did also. MBS were subsequently connected with credit default swaps, or CDS, which is an equally complex kind of betting that resembles insurance. With the home recession, the worth of CDS and MBS tumbled, leaving Fannie Mae in a precarious situation.
Food for Thought
Fannie Mae and its GSE counterpart Freddie Mac are the two biggest players in the secondary mortgage marketplace, controlling as much as 90 percent of the business. As a result of this near-monopoly, some think the government backing they receive must be eliminated to foster competition and decrease the current market 's dependence on them. In their present condition, if they fail, taxpayers will need to pick up the tab and the mortgage market will be without its biggest buyers.