Fannie Mae
The largest source of home mortgage loans in the United States was founded as a government-sponsored organization whose primary business activities involve procuring and guaranteeing mortgages issued by originators made possible by the secondary mortgage market.
What is Fannie Mae?
The Federal National Mortgage Association (FNMA), affectionately known as Fannie Mae, was founded as a government-sponsored organization in the United States. Their primary business activities involve procuring and guaranteeing mortgages issued by originators made possible by the secondary mortgage market.
FNMA was founded in 1938 to provide access to reliable housing funding when owning became difficult due to a severely constrained payment timeline (large down payments with short-term loans) in the 20th century.
Loan guarantees were added to FNMA's scope of authority in 1944, and veterans predominated in business management. Mae became a joint-stock company in 1954. Raymond H. Lapin took over as FNMA's president in 1968.
In 1968, the institution's privatization and designation as a Government Sponsored Enterprise (GSE) made it possible to buy conventional mortgages, generally long-term loans with a 30-year average maturity.
He changed the organization's structure and transformed it into a private joint-stock business over his 30 years of leadership. As a result, in 1970, the New York Stock Exchange listed FNMA stock.
FNMA originally sold corporate bonds abroad in 1984, and since then, the company has expanded into the international financial market. As a result, Mae is the world's biggest non-bank financial services provider. This firm is traded on the New York Stock Exchange.
The company's business, the country's largest home loan financing provider, is governed by federal laws.
Through a $2 trillion American Dream Commitment to increase homeownership rates by the end of the decade and provide financial services to 18 million targeted American households, Fannie Mae is attempting to overcome the "homeownership ambitions gap" in the country.
NOTE
More than 58 million families have received mortgage finance from FNMA since 1968, totaling more than $5.7 trillion.
As the subprime mortgage crisis continued, the housing market was sluggish, and foreclosures increased significantly; the U.S. government announced on September 7, 2008, that it would take over FNMA, which was on the verge of bankruptcy, and another government with a possible price of up to 200 billion U.S. dollars to sponsor Freddie Mac.
The former direct regulatory unit of the U.S. government for FNMA was the Office of Federal Housing Enterprise Oversight (OFHEO), and now it is the newly established Federal Housing Finance Agency.
How Fannie Mae Works
FNMA, an integral part of the U.S. housing industry, operates in the U.S. secondary mortgage credit market, ensuring that mortgage banks and other lenders have sufficient funds to lend to home buyers at low interest rates.
While not directly lending to homebuyers, Mae backs home loan financing by purchasing home mortgages from various lenders that lend directly to homebuyers. Lenders doing business with FNMA are part of the primary mortgage market.
Primary market lenders include mortgage companies, savings and loan institutions, commercial banks, credit unions, and state and local housing credit agencies. In addition, these lenders sell mortgages in the secondary market.
Secondary market investors include FNMA, various pension funds, insurance companies, securities dealers, and other financial institutions. FNMA's mission is to provide lenders with a steady stream of mortgage funding.
Mae provides the following three services to the market through three main business units: Mortgage Portfolio, Single Family Guarantee, and Residential and Community Development:
Loan-Backed Securities
Mae's credit guarantee business began in 1981. Since 1990, FNMA has been the largest issuer of institutional mortgage-backed securities in the United States.
Mae helps lenders package mortgage loans into mortgage-backed securities and guarantees the credit quality of those securities. This enhances the security's marketability.
Mortgage Investment
FNMA's mortgage investment business began in 1938 by selling debt securities to domestic and global investors to raise capital, using these funds to purchase mortgage assets from lending institutions and the open market, and holding these mortgages as part of an investment portfolio.
This also helps lenders replenish loan funds.
Family Housing Investment
FNMA provides financing support to lenders to develop apartment complexes and other rental housing, especially affordable housing.
Fannie Mae Mortgage Crisis
The U.S. real estate mortgage giants Freddie Mac and Fannie Mae suffered a loss of $70 billion in 2008 due to the U.S. subprime mortgage crisis. As a result, the U.S. SEC and Federal Reserve joined forces to launch an attack, which immediately impacted U.S. markets' stability.
On September 7, 2008, the U.S. government declared that it would take over FNMA and Freddie Mac, two of the country's biggest institutions, to finance home mortgages.
The U.S. Department of the Treasury will inject money into Fannie Mae and Freddie Mac and buy related preferred shares as part of the takeover plan.
The CEOs of the two institutions will also be given orders to resign, and relevant government regulatory agencies will take over the day-to-day management of the two institutions while selecting a new CEO.
FNMA and Freddie Mac are experiencing a severe problem due to the U.S. real estate bubble crash. As a result, the two banks have lost more than $14 billion in the last year.
According to U.S. Treasury Secretary Henry Paulson, the issues with Mae and Freddie Mac have exposed the financial sector to systemic dangers, making the current takeover of these two firms the "best option" to safeguard the market and taxpayers.
Fannie Mae’s Failure
In a seedy area on the southside of Atlanta in June 2002, President Bush was standing in St. Paul's African Methodist Protestant Episcopal Church. Leland Brendsel, CEO of Freddie Mac, and Franklin Raines, CEO of Mae, were both there at the time.
The president will present an action plan to assist 5.5 million minority families in purchasing homes by 2010. One thing that contributes to America's safety, he noted, is encouraging house ownership.
Because promoting home ownership is the responsibility of the two congressionally authorized businesses, Raines and Brandesel were on the president's floor for that reason.
By purchasing hundreds of billions in mortgages from banks, FNMA and its sister business, Freddie Mac, have assisted financial institutions in recycling capital, allowing them to provide additional loans to prospective homebuyers.
Unfortunately, not much has changed three years since that day in Atlanta. Following multibillion-dollar accounting problems at both corporations, Brendsel and Raines were sacked.
After federal regulators accused Freddie Mac of concealing billions of dollars in revenues to boost earnings, Brandesel resigned in 2003.
In a later decision, the SEC found that FNMA had overstated profits by an estimated $9 billion since 2001, or 40% of the company's overall earnings for the same time, in violation of accounting regulations.
FNMA was the larger and more significant of the two businesses. Raines served as CEO for six years, earning more than $90 million in compensation, much of it after exceeding earnings goals. He made valiant attempts to hold onto his position but in vain.
Tim Howard, the organization's chief financial officer, was also compelled to quit. KPMG was also let go after working for Fannie Mae for 36 years.
Conclusion
Fannie Mae (NYSE: FNM), formerly known as the Federal National Mortgage Association, is the largest GSE Government Sponsored Enterprise.
The main business is acquiring loans in the U.S. housing mortgage (mortgage loan) secondary market and issuing institutional bonds or securitized mortgage loans to investors to raise funds at a lower cost and earn interest spreads.
FNMA, founded in 1938, is the largest source of home mortgage loans in the United States. The company is a publicly traded, government-backed company with the primary goal of making home loans more accessible to low- and middle-income families in the United States.
FNMA does not directly provide loans to home buyers. Still, it promotes the supply of funds in the mortgage loan market by buying mortgage (mortgage loan) assets from lending institutions or providing credit guarantee services.
FNMA sees the mortgages it purchases directly from lenders as a component of its portfolio, or "portfolio business." Additionally, its credit guarantee business helps lenders transform mortgage assets into MBS.
After carefully examining the mortgage loans offered by the lending institutions, FNMA concentrates and bundles them into a portfolio, offers credit guarantees for them, and levies a guarantee fee.
An MBS issued by a lending institution as a secured loan portfolio in the market is known as Fannie Mae’s MBS. Fannie Mae financed the purchase loans by issuing corporate bonds.
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