FANNIE MAE (Federal National Mortgage Association)

What is Fannie Mae?

Fannie Mae, officially the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise (GSE) that plays a crucial role in the secondary mortgage market in the United States. By purchasing and guaranteeing mortgage loans, Fannie Mae helps to increase the supply of money available for mortgage lending. It creates liquidity for lenders and offers new homeowners better mortgage rates and options.

Examples of Fannie Mae’s Impact

Home Affordable Refinance Program (HARP): Fannie Mae supports this program, enabling homeowners with loan-to-value (LTV) ratios above 80% to refinance at more favorable interest rates.
Green Mortgage Loans: Fannie Mae offers preferential terms for multifamily property owners who invest in energy and water efficiency improvements.
First-Time Home Buyer Programs: Fannie Mae provides special considerations and lower down payment options through its HomeReady® mortgage product for first-time buyers and those with low to moderate incomes.

Frequently Asked Questions (FAQs)

1. What is the primary function of Fannie Mae? Fannie Mae’s primary role is to purchase mortgages from lenders, providing them with the liquidity to offer more loans to consumers.

2. How does Fannie Mae affect mortgage rates? By purchasing and guaranteeing mortgage loans, Fannie Mae provides lenders with capital, which can lead to lower interest rates for borrowers as lenders pass savings along.

3. Is Fannie Mae a public or private entity? Fannie Mae is classified as a government-sponsored enterprise (GSE). It combines characteristics of both private corporation and a government agency. After the financial crisis in 2008, it was placed under conservatorship of the Federal Housing Finance Agency (FHFA).

4. Who are Fannie Mae’s primary investors? Fannie Mae issues mortgage-backed securities (MBS) to institutional investors such as banks, insurance companies, pension funds, and mutual funds.

5. How did the 2008 financial crisis affect Fannie Mae? The financial crisis led to Fannie Mae being placed under conservatorship by the FHFA and a U.S. government takeover with an 80% ownership stake to stabilize the housing market.

Freddie Mac (Federal Home Loan Mortgage Corporation): Another GSE similar to Fannie Mae that buys mortgages and packages them into mortgage-backed securities.
Government-Sponsored Enterprise (GSE): Financial services corporations created by Congress to enhance the flow of credit to specific sectors of the economy.
Mortgage-Backed Security (MBS): A type of investment that is secured by a collection of mortgages.
Conservatorship: A situation in which a government entity takes control of a private company to stabilize its operations.

Online Resources

References

Federal Housing Finance Agency. “Conservatorship of Fannie Mae.” FHFA.gov.
Investopedia. “Fannie Mae (Federal National Mortgage Association).” Investopedia.com.

Suggested Books for Further Studies

Fabozzi, Frank J., and Modigliani, Franco. Mortgage and Mortgage-Backed Securities Markets. Harvard Business Review Press.
Acharya, Viral V., et al. Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance. Princeton University Press.
White, Lawrence J. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. Oxford University Press.

Real Estate Basics: Fannie Mae Fundamentals Quiz

### What is the primary function of Fannie Mae? - [x] To buy mortgages from lenders, providing liquidity. - [ ] To originate new loans directly to homebuyers. - [ ] To manage mortgage delinquency collections. - [ ] To offer homeowner insurance policies. > **Explanation:** Fannie Mae's primary role is to purchase mortgages from lenders, providing them with liquidity to continue making new loans. ### How does Fannie Mae support homebuyers? - [x] By increasing mortgage availability and affordability. - [ ] By directly issuing personal loans. - [ ] By employing real estate agents. - [ ] By providing homeowner's insurance. > **Explanation:** Fannie Mae increases mortgage availability and supports favorable interest rates, making homeownership more affordable. ### What type of financial instrument does Fannie Mae issue to investors? - [x] Mortgage-Backed Securities (MBS) - [ ] Corporate Bonds - [ ] Mutual Fund Shares - [ ] Treasury Bonds > **Explanation:** Fannie Mae issues mortgage-backed securities (MBS) to institutional investors, backed by the mortgages they purchase. ### What significant event happened to Fannie Mae during the 2008 financial crisis? - [ ] It became a fully private company. - [ ] It was dissolved by Congress. - [x] It was placed under conservatorship by FHFA. - [ ] It merged with Freddie Mac. > **Explanation:** The financial crisis led to Fannie Mae being placed under conservatorship by the FHFA to stabilize the housing market. ### Define 'conservatorship' in the context of Fannie Mae. - [x] Government control to stabilize a private company. - [ ] Licensing a new developer. - [ ] Creating new mortgage policies. - [ ] Selling off company assets. > **Explanation:** Conservatorship refers to a government entity taking control of a private company to stabilize operations, as seen with Fannie Mae. ### What kind of entities invest in Fannie Mae's Mortgage-Backed Securities? - [ ] Individual retail investors only. - [ ] Local municipalities. - [ ] Foreign governments. - [x] Institutional investors like banks and insurance companies. > **Explanation:** Institutional investors such as banks, insurance companies, and pension funds invest in Fannie Mae's Mortgage-Backed Securities. ### What does the term 'Government-Sponsored Enterprise' mean? - [x] A financial services corporation created by Congress to enhance credit flow to specific sectors. - [ ] An entirely private company with no government oversight. - [ ] A government body issuing direct mortgages. - [ ] A nonprofit housing advocacy group. > **Explanation:** A Government-Sponsored Enterprise (GSE) is created by Congress to improve the flow of credit in specific sectors, combining private operation with government oversight. ### What characteristic does a Fannie Mae loan typically offer? - [ ] Short term loan options. - [ ] Higher interest rates. - [x] More competitive mortgage rates. - [ ] Minimal down payment requirements only for high-income earners. > **Explanation:** Loans backed by Fannie Mae typically offer more competitive mortgage rates by increasing lenders' liquidity. ### Who governs Fannie Mae currently? - [ ] United States Congress directly. - [ ] Federal Reserve. - [ ] Office of the Comptroller of the Currency. - [x] Federal Housing Finance Agency (FHFA). > **Explanation:** The Federal Housing Finance Agency (FHFA) governs Fannie Mae, primarily after it was placed under conservatorship in 2008. ### What program does Fannie Mae offer to help homeowners with high loan-to-value ratios? - [ ] Home Ready Program - [ ] Property Improvement Initiative - [x] Home Affordable Refinance Program (HARP) - [ ] Direct Lending Initiative > **Explanation:** Fannie Mae supports the Home Affordable Refinance Program (HARP) to assist homeowners with high loan-to-value ratios refinancing their mortgages.