What is Fannie Mae?

Fannie Mae or the Federal National Mortgage Association (FNMA) is a government-sponsored enterprise (GSE), which was created to stimulate the housing market in the United States. The company, established in 1938 by the US Congress during the Great Depression, aimed to make more mortgages available to low and moderate-income families.

It’s important to note that Fannie Mae does not provide mortgages to borrowers. Instead, it acquires them from banks, credit unions and mortgage brokers and packages them into mortgage-backed securities (MBS). The securities are further sold to investors, including individual investors, other banks, hedge funds and pension funds.

Fannie Mae is included in the Fortune 500, a list of the largest corporations in the United states by revenue. It also has a sister organisation, Freddie Mac (the Federal Home Loan Mortgage Corporation), which is another popular GSE supported by the US Congress.

What does Fannie May stand for?

Fannie May buys mortgages and pays investors their share of a monthly mortgage payment, including both interest and principal. Fannie May guarantees the payment, but there are still several risks investors could face:

• Falling interest rates can decrease the value of MBS. A homeowner can prepay the mortgage, which means the investor will receive less than they expected.

• The borrower may go bankrupt. Although Fannie May guarantees the payment, a borrower’s default may prevent the company from making timely payments.

The company is also involved in financing the development of affordable rental housing. A particular part of Fannie Mae’s mortgages must be dedicated to moderate and low-income borrowers.

What is a FNMA loan?

A mortgage guaranteed by Fannie Mae is called an FNMA loan. Almost all mortgage lenders and banks in the US provide them. Borrowers and the property they want to buy must qualify and comply with certain requirements to receive an FNMA loan.

For example, the loan should be no more than $427,000 (£331,000, €363,000) and your debt should not exceed 28 per cent of your income. You should be able to make a five per cent downpayment.

FNMA stock trading

Fannie Mae’s stock (FNMA) was traded on the New York stock exchange till 2010. The company later announced that its stock will be transferred to the OTC Bulletin Board.

There is a view that Fannie Mae and Freddie Mac greatly contributed to the financial crisis of 2007-2008. Both GSEs were given a monopoly in a broad segment of the US secondary mortgage market. This monopoly and a guarantee from the government to keep the companies afloat later resulted in the mortgage market collapse.

In 2007, Fannie and Freddie experienced big losses on their retained portfolios, threatening to make them insolvent. Eventually the federal regulators enabled the companies to take on another $200bn in debt, hoping to stabilise the economy.

Although there were a lot of contributing factors which led to the Great Recession, analysts say Fannie Mae and Freddie Mac pulled enormous amounts of debt and credit guarantees, posing a threat to the global financial system.