What is the Federal National Mortgage Association (FNMA)?
The Federal National Mortgage Association, commonly known as Fannie Mae, is a government-sponsored enterprise (GSE) that aims to enhance the flow of credit in the mortgage market. It was established in 1938 during the Great Depression to provide local banks with federal money to finance home mortgages, aimed at increasing homeownership and the availability of affordable housing.
Functions and Operations
FNMA operates primarily in the secondary mortgage market. Its main functions include:
- Purchasing Mortgage Loans: Fannie Mae buys conforming mortgages that meet specific criteria from mortgage lenders, thereby providing these lenders with capital to issue additional home loans.
- Securitization: After purchasing mortgage loans, FNMA bundles them into mortgage-backed securities (MBS), which are then sold to investors.
- Guarantees: Fannie Mae guarantees timely payments of principal and interest to holders of its MBS, offering investors security and stability.
Historical Context
Fannie Mae was initially part of the federal government until it was privatized in 1968. Despite being a private corporation, it holds a federal charter and maintains a close relationship with the government, making it a unique hybrid. The Federal Housing Finance Agency (FHFA) currently regulates it.
Examples of FNMA Activities
-
Provide Liquidity for Home Loans:
- A local bank originates a mortgage loan for a homebuyer.
- FNMA purchases this loan from the bank, providing the bank with funds to issue more loans.
- FNMA repeats this process to ensure a steady flow of mortgage funds in the market.
-
Creation of Mortgage-Backed Securities:
- FNMA purchases multiple mortgage loans from various lenders.
- It pools these loans into MBS which are sold to investors.
- Investors in MBS receive monthly payments that include principal and interest from the underlying pool of mortgage loans.
Frequently Asked Questions (FAQs)
How does Fannie Mae influence mortgage interest rates?
Fannie Mae’s activities in buying and securitizing loans can stabilize and lower interest rates. By providing lenders with liquidity, lenders are less likely to retain mortgages on their balance sheets, allowing them to offer lower rates on new loans.
What types of loans does FNMA purchase?
Fannie Mae predominantly purchases conforming loans, which fit within set criteria regarding loan size, proof of borrower’s credit, income, and other aspects necessary to ensure low risk and sound underwriting.
How does FNMA support affordable housing?
FNMA supports affordable housing by offering products tailored to specific populations, such as lower-income or first-time homebuyers, often accompanied by advantageous lending terms.
What is the difference between Fannie Mae and Freddie Mac?
Both are GSEs involved in the secondary mortgage market. However, while Fannie Mae purchases loans from larger commercial banks, Freddie Mac primarily buys them from smaller banks and credit unions.
What risks are associated with FNMA?
Risks include exposure to the housing market’s fluctuations, changes in interest rates, and their potential impacts on the value of mortgage-backed securities.
Related Terms
Secondary Mortgage Market: A market where existing mortgage loans are bought and sold. This market allows lenders to offload risk and obtain capital to issue new loans.
Government-Sponsored Enterprise (GSE): A financial services corporation created by the U.S. Congress to enhance the flow of credit to specific sectors of the economy, such as housing.
Mortgage-Backed Securities (MBS): Investments that are secured by mortgage loans. Investors in MBS receive periodic payments derived from the mortgage loans pooled within the securities.
Freddie Mac: Officially the Federal Home Loan Mortgage Corporation (FHLMC), another GSE that operates similarly to Fannie Mae, buying mortgages and creating mortgage-backed securities.
Online Resources
- Fannie Mae Official Website
- Federal Housing Finance Agency (FHFA)
- Investopedia’s Guide to Fannie Mae
References
- “Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare” – by Oonagh McDonald
- Federal Housing Finance Agency. (2023). “About Fannie Mae & Freddie Mac.”
- Investopedia. “Fannie Mae: What It Does and How It Operates.”
Suggested Books for Further Studies
- “The Big Short: Inside the Doomsday Machine” by Michael Lewis
- Provides insight into the mortgage-backed securities market and the financial crisis of 2008.
- “Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis” by Paul Muolo and Mathew Padilla
- Discusses the broader implications of mortgage securities and the impact of institutions like Fannie Mae.
- “Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques” by Frank J. Fabozzi
- Detailed examination of MBS products and underlying structures.
Real Estate Basics: Federal National Mortgage Association (FNMA) Fundamentals Quiz
