Fannie Mae

foundation = 1938
location_city = Washington, D.C.
company_name = Federal National Mortgage Association (Fannie Mae)
company_type = Government Sponsored Enterprise & Public company
key_people = Herbert M. Allison, CEO
revenue = $44.8 billion for 2007cite web |url= |title=Google Finance: Fannie Mae |work=Google |accessdate=2008-08-06]
operating_income = US$ -5.1 billion for 2007
net_income = US$ -2.0 billion for 2007
assets = US$ 882.5 billion for 2007
equity = US$ 44.0 billion for 2007
homepage = [ Fannie Mae]

The Federal National Mortgage Association (FNMA) (nyse|FNM), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government sponsored enterprise (GSE), but founded in 1938 during the Depression. Contrary to some misleading information in the media, Fannie Mae does not make home loans directly to consumers, but rather functions as a leading participant in the U.S. secondary mortgage market. By purchasing and securitizing mortgages, Fannie Mae facilitates liquidity in the primary mortgage market by ensuring that funds are consistently available to the institutions that do lend money to home buyers.Fact|date=October 2008

On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac). The action is "one of the most sweeping government interventions in private financial markets in decades". [ ] ] ] As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.Duhigg, Charles, [ "Loan-Agency Woes Swell From a Trickle to a Torrent"] , The New York Times, Friday, July 11, 2008]


In the wake of the Great Depression, Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt's New Deal in order to facilitate liquidity within the mortgage market. In 1968, the government converted Fannie Mae into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget. [Krishna Guha, Saskia Scholtes, James Politi: "Saviours of the suburbs", Financial Times, June 4, 2008, page 13] Consequently, 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). In 1970, the government created the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, to compete with Fannie Mae and, thus, facilitate a more robust and efficient secondary mortgage market. Since the creation of the GSEs, there has been debate surrounding their role in the mortgage market, their relationship with the government, and whether or not they are indeed necessary. This debate gained relevance due to the collapse of the U.S. housing market and subprime mortgage crisis that began in 2007. Despite this debate, Fannie Mae, as well as Ginnie Mae and later Freddie Mac, has played an integral part in the development of the most successful mortgage market in the world which has allowed U.S. citizens benefit from one of the highest home ownership percentages in the world.

In 1999, Fannie Mae came under intense pressure from the Clinton administration to ease its credit requirements on mortgages it is willing to purchase in order to encourage lenders to extend more mortgages to borrowers with low to moderate income and improve rates of home ownership among those groups. Shareholders also pressured Fannie Mae to purchase mortgages below its conventional credit standards in order to maintain its record profits. [cite news|url=| title=Fannie Mae Eases Credit To Aid Mortgage Lending|first=Steven A. |last=Holmes|date=September 30, 1999|publisher=New York Times]

In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals. [cite news|url=| title=How HUD Mortgage Policy Fed The Crisis|first=Carol D. |last=Leonnig|date= June 10, 2008|publisher=Washington Post]

Fannie Mae was put under a conservatorship of the U.S. Federal government on September 7, 2008. [Federal takeover of Fannie Mae and Freddie Mac]

Warnings on how banks assess risks

Nassim Taleb warned sharply about the ways banks manage their risks, and the interlocking nature of modern irresponsible finance.
In 2006, in The Black Swan [ [ The Black Swan: Quotes & Warnings that the Imbeciles Chose to Ignore]

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events "unlikely".

Business mechanism

Fannie Mae (and Freddie Mac) buy loans from mortgage originators, such as banks and non-bank mortgage firms. It repackages the loans, as mortgage backed securities, and sells them on the secondary mortgage market, with a guarantee that the interest and principal will be paid, whether or not the original borrower pays. Also, Fannie Mae may hold the purchased mortgages for its own portfolio. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.]

In order for Fannie Mae to provide its guarantee to mortgage backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Mortgages that don't follow the guidelines are called "non-conforming"; typically the secondary market for non-conforming loans deals in mortgages larger (termed "jumbo") than the maximum mortgage that Fannie Mae and Freddie Mac will purchase.

The mortgage crisis from late 2007

Following their mission to meet federal Housing and Urban Development (HUD) housing goals [ (HUD government goals)] , GSE's such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have strived to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions." [ (HUD 2002 Annual Housing Activites Report)] Then in 2007, the subprime mortgage crisis began. An increasing number of borrowers, often with poor credit that were unable to pay their mortgages - particularly with adjustable rate mortgages (ARM), caused a precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July of 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels. On August 27, 2008, Fannie Mae announced that the company's chief financial officer, Stephen Swad, was being replaced by David C. Hisey and former Executive Vice President of Capital markets, Peter Niculescu, would take on an expanded role as the new Chief Business Officer to replace Robert J. Levin, who would be retiring as Executive Vice President and Chief Business Officer. The company also announced that Michael Shaw would be appointed as the new chief risk officer and Daniel Mudd, the company's president and chief executive officer, would remain in place. [cite web
title =Fannie Mae CEO Dan Mudd Announces Management Restructuring to Drive Capital Management and Credit Loss Reduction Plan
publisher =Fannie Mae
date =2008-08-27
url =;jsessionid=VZQ0JAHRSZFBFJ2FQSHSFGA?p=Media&s=News+Releases
accessdate =2008-09-03


One part of Fannie Mae's income is generated through the positive interest rate spread between the rate paid to fund the purchase of mortgage investments and the return it earns on those retained mortgage investments. Fannie Mae's mortgage portfolio was in excess of $700 billion as of August 2008. Fannie Mae also earns a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on the mortgage loans underlying its single-family Fannie Mae MBS and on the single-family mortgage loans held in its retained portfolio. 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 scheduled principal and interest on the underlying loan will be paid even if the borrower defaults.

Alan Greenspan and Ben Bernanke have spoken publicly in favor 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.October 2008

Conforming loans

Fannie Mae and Freddie Mac have a limit on the maximum sized loan they will guarantee. This is known as the "conforming loan limit". The conforming loan limit for Fannie Mae (along with Freddie Mac) is set by Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of both GSEs. OFHEO 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, lowering the demand for non-conforming loans. By virtue of the law 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 percent.) The conforming loan limit is 50 percent higher in Alaska and Hawaii. However, in 2008, since the demand for bonds not guaranteed by the corporations is almost non-existent, non-conforming loans are almost 1% to 1.5% higher than the conforming loans.

Guarantees and subsidies

Speculation that the U.S. government would bail out an insolvent Fannie Mae is a hypothesis that had never been tested until recently, when the subprime mortgage crisis hit the U.S.

On July 11, 2008, the New York Times reported that U.S. government officials were considering a plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisisDuhigg, Charles, [ "Loan-Agency Woes Swell From a Trickle to a Torrent"] , The New York Times, Friday, July 11, 2008] . The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies.

Shares in U.S. mortgage finance firms Fannie Mae and Freddie Mac plunged on Friday, July 11, 2008, and market speculation mounted that the government was set to take them over to resolve their funding problems.

Shares continued to plummet [Michael M. Grynbaum: [ Woes at Loan Agencies and Oil-Price Spike Roil Markets] , New York Times, July 12, 2008] as investors became unsure about the adequacy of the capital held by FNMA. U.S. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae.

Fannie Mae and smaller Freddie Mac own or guarantee almost half of all home loans in the United States. They face billions of dollars in potential losses, and may need to raise additional, potentially substantial, amounts of new capital as the current downturn in the U.S. housing market continues.

Markets assume that the taxpayer will if necessary take on the burden of all their mortgages because they underpin the whole U.S. mortgage market.If they were to collapse, mortgages would be harder to obtain and much more expensive.U.S. Treasury Secretary Henry Paulson has said the government's primary focus is in supporting Fannie Mae and Freddie Mac in their current form. [Paulson stands by Fannie and Freddie [] ]

No actual guarantees

Fannie Mae receives no direct government funding or backing; 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.

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.

The perception of government guarantees has allowed Fannie Mae and Freddie Mac to save billions in borrowing costs. Estimates by the Congressional Budget Office and the Treasury Department put the figure at about $2 billion per year [ [ CATO Institute, November 17, 1997] ] .

Assumed guarantees

There is a wide belief that FNMA securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA "implicitly taxpayer-backed agencies." [Vernon L. Smith, [ "The Clinton Housing Bubble"] , Wall Street Journal, December 18, 2007, p. A20] The Economist has referred to " [t] he implicit government guarantee" [The Economist, "Fannie and Freddie ride again", July 5, 2007] of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae's (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail. [Fed Chief Warns of a Risk to Taxpayers [] ]

Federal subsidies

The FNMA receives no direct federal government aid. However, the corporation and the securities it issues are widely believed to be implicitly backed by the U.S. government. In 1996, the Congressional Budget Office wrote "there have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises... Government-sponsored enterprises are costly to the government and taxpayers... the benefit is currently worth $6.5 billion annually." [ [ Congressional Budget Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac, May 1996] ] . Fannie Mae and Freddie Mac are allowed to hold less capital than normal financial institutions: e.g., it is allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions. Specifically, regulations exist through the FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%. [ [ FDIC: FDIC Law, Regulations, Related Acts - Bank Holding Company Act ] ] The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the current subprime mortgage crisis. FNMA is also exempt from state and local taxes. In addition, FNMA and FHLMC are exempt from SEC filing requirements; however, both GSEs voluntarily file their SEC 10-K and 10-Q.


FNMA is a financial corporation which uses derivatives to "hedge" its cash flow. Derivative products it uses include interest rate swaps and options to enter interest rate swaps ("pay-fixed swaps", "receive-fixed swaps", "basis swaps", "interest rate caps and swaptions", "forward starting swaps").

*FNMA's accounting is discussed in [ Barron's: Fannie Mae faces more income issues - Banks - Financial - Real Estate - Financial Services - General]

Duration gap is a financial and accounting term for the difference between the duration of assets and liabilities, and is typically used by banks, pension funds, or other financial institutions to measure their risk due to changes in the interest rate
* [ UPDATE - Fannie Mae average duration gap widens in April] "The company said that in April its average duration gap widened to plus 3 months in April from zero in March." "The Washington-based company aims to keep its duration gap between minus 6 months to plus 6 months. From September 2003 to March, the gap has run between plus to minus one month."


On September 7, 2008, Federal Housing Finance Agency (FHFA) Director James B. Lockhart III announced pursuant to the financial analysis, assessments and statutory authority of the FHFA, he had placed Fannie Mae and Freddie Mac under the conservatorship of the FHFA. FHFA has stated that there are no plans to liquidate the company. [] ] The announcement followed reports two days earlier that the Federal government was planning to take over Fannie Mae and Freddie Mac and had met with their CEOs on short notice. cite news | first= David S. | last= Hilzenrath | coauthors= Zachary A. Goldfarb | title= Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say | date= 2008-09-05 | publisher= | url = | work = Washington Post | pages = | accessdate = 2008-09-05 ] cite news | first = Stephen | last = Labaton | coauthors= Andres Ross Sorkin | title= U.S. Rescue Seen at Hand for 2 Mortgage Giants
date= 2008-09-05 | publisher= | url = | work = New York Times | pages = | accessdate =2008-09-05
] cite news | first= David S. | last= Hilzenrath, | coauthors= Neil Irwin, and Zachary A. Goldfarb | title= U.S. Nears Rescue Plan For Fannie And Freddie Deal Said to Involve Change of Leadership, Infusions of Capital | date= 2008-09-06 | publisher= | url = | work = Washington Post | pages = A1 | accessdate = 2008-09-06 ] Under plan announced September 7, 2008, the federal government, via the Federal Housing Finance Agency, placed the two firms into conservatorship, and for each entity, dismissed the chief executive officer, and dismissed the present board of directors, and caused the issuance to the Treasury new senior preferred stock and separately warrants for common stock amounting to 79.9% of each GSE. The value of the common stock and preferred stock to pre-conservatorship holders was greatly diminished by the suspension of future dividends on previously outstanding stock, in the effort to maintain the value of company debt and of mortgage-backed securities. ] cite news | first= Henry M., Jr. | last= Paulson | coauthors= (Press release statement) | title= Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers | date= 2008-09-07 | publisher= United States Department of the Treasury | url = | work = | pages = | accessdate = 2008-09-07 | ] ] ] The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008 law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling US$ 800 billion, to a total of US$ 10.7 Trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks.cite news | first= David | last= Herszenhorn | coauthors= | title= Congress Sends Housing Relief Bill to President
date= 2008-07-27 | publisher= | url =
work = New York Times | pages = | accessdate = 2008-09-06
] ] [ See HR 3221, signed into law as Public Law 110-289: "A bill to provide needed housing reform and for other purposes."
Access to Legislative History: Library of Congress THOMAS: [ A bill to provide needed housing reform and for other purposes.]
White House pre-signing statement: [ Statement of Administration Policy: H.R. 3221 – Housing and Economic Recovery Act of 2008 ] (July 23, 2008 ). Executive office of the President, Office of Management and Budget, Washington DC.


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.

Fannie Mae was expected to spend more than $1 billion in 2006 alone to complete its internal audit and bring it closer to compliance. The necessary restatement was expected to cost $10.8 billion, but was completed at a total cost of $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 sought 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.

Conflict of interest

In June 2008, the Wall Street Journal reported that two former CEOs of Fannie Mae, James A. Johnson and Franklin Raines had received loans below market rate from Countrywide Financial. Fannie Mae was the biggest buyer of Countrywide's mortgages. [ [ Countrywide Friends Got Good Loans -] ]

Fannie Mae and Freddie Mac have strategically given contributions to lawmakers currently sitting on committees that primarily regulate their industry: The House Financial Services Committee; the Senate Banking, Housing & Urban Affairs Committee; or the Senate Finance Committee. The others have seats on the powerful Appropriations or Ways & Means committees, are members of the congressional leadership or have run for president.

Barney Frank has been a member of the House Financial Services Committee since 1991 (and is currently the chair). The HFSC is one of two government entities responsible for oversight over Fannie Mae. From 1991 to 1998, Barney Frank had a lover, Herb Moses, who was an executive at Fannie Mae. While at Fannie Mae, Moses helped develop many of Fannie Mae’s affordable housing and home improvement lending programs. Other lawmakers have called this a "clear conflict of interest." [ [,2933,432501,00.html] ]

Both major 2008 presidential candidates have close ties to FNMA: [ [ Michael Isikoff, Newsweek Magazine, Sep 24, 2008]

John McCain's campaign manager, Rick Davis was paid in excess of $1.8 million by FNMA to prevent increased regulations. [ [ David Kirkpatrick and Chalres Duhigg, NY Times, September 21, 2008] John McCain received $169,000 in campaign contributions from Fannie Mae and Freddie Mac executive management.cite news | author = Jackie Calmes | title = '08 Rivals Have Ties to Loan Giants | url = | publisher = New York Times | date = 2008-09-09 | accessdate = 2008-10-09]

Barack Obama received $105,849 in campaign contributions from Fannie Mae employees and PACs. [cite news | author = Lindsay Renick Mayer | title = Fannie Mae and Freddie Mac Invest in Democrats | url = | publisher = Opensecrets | date = 2008-07-16 | accessdate = 2008-10-09] , including $16,000 in campaign contributions from Fannie Mae and Freddie Mac executive management.


*Herbert M. Allison (2008- )
*Daniel Mudd (2005-2008)
*Franklin Raines (1999-2004)
*James A. Johnson (1991-1998)


ee also

*Freddie Mac

External links

* [ Fannie Mae Official website]
* [;FNM Fannie Mae Profile] , "BusinessWeek"
* [ Fannie Mae Profile] , "FrontPage Magazine"
* [ Fannie Mae Profile] , "New York Times"

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Fannie Mae — Rechtsform GSE ISIN US3135861090 Gründung 1938 …   Deutsch Wikipedia

  • Fannie Mae — Тип Публичная компания …   Википедия

  • Fannie Mae — Saltar a navegación, búsqueda La Federal National Mortgage Association (FNMA) (NYSE: FNM), que significa Asociación Federal Nacional Hipotecaria y es conocida como Fannie Mae, era una empresa de capital abierto, garantizada por el gobierno de los …   Wikipedia Español

  • Fannie Mae — USA Common term for the Federal National Mortgage Association. Fannie Mae was created by the federal government in 1938 to create a secondary market for mortgages by buying mortgages from lenders and was later converted into a publicly traded… …   Law dictionary

  • Fannie Mae — 1948, from FNMA, acronym of Federal National Mortgage Association, established 1938 …   Etymology dictionary

  • Fannie Mae — (Federal National Mortgage Association) U.S. Government chartered corporation that purchases mortgages from lenders and reoffers them to investors as mortgage backed securities (ensures that banks have a constant supply of mortgage funds) …   English contemporary dictionary

  • Fannie Mae — ☆ Fannie Mae [mā′ ] n. informal name for Federal National Mortgage Association: a government sponsored corporation, formerly a federal agency, which purchases mortgages from lending institutions and issues mortgage backed certificates and long… …   English World dictionary

  • Fannie Mae — 1. See Federal National Mortgage Association. 2. any of the publicly traded securities collateralized by a pool of mortgages backed by the Federal National Mortgage Association. Also, Fanny Mae. Cf. Freddie Mac, Ginnie Mae. [altered from FNMA,… …   Universalium

  • Fannie Mae — An informal name for the Federal National Mortgage Association ( FNMA) or for securities issued by it. American Banker Glossary ( Federal National Mortgage Association) A publicly owned, government sponsored corporation chartered in 1938 to… …   Financial and business terms

  • Fannie Mae — Federal National Mortgage Association Logo de Federal National Mortgage Association Création 1938 …   Wikipédia en Français

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.