What is Fannie Mae?

Fannie Mae, officially known as the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise (GSE) established to expand the secondary mortgage market by securitizing mortgages into mortgage-backed securities. This process allows lenders to reinvest their assets into more lending and increases the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations. Fannie Mae’s mission is to provide liquidity, stability, and affordability to the U.S. housing and mortgage markets.

Fannie Mae, officially known as the Federal National Mortgage Association (FNMA), plays a pivotal role in the U.S. mortgage system. Established in 1938 as part of the New Deal, this government-sponsored enterprise (GSE) was designed to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and increasing the number of lenders in the mortgage market. Here's how Fannie Mae supports the U.S. mortgage system:

1. Increases Liquidity in the Mortgage Market

• Purchase and Securitization of Mortgages: Fannie Mae buys mortgages from lenders such as banks and mortgage companies, then securitizes them (i.e., bundles them into mortgage-backed securities) and sells these securities to investors on the global capital markets. This process provides lenders with the liquidity to issue more loans, thereby increasing the availability of mortgage financing to homebuyers.

• Stability and Confidence: By providing liquidity, Fannie Mae helps maintain stability and confidence in the U.S. housing market, particularly during economic downturns when private capital retreats from housing finance.

2. Standardizes Mortgage Practices

• Conforming Loans: Fannie Mae sets guidelines for what it terms 'conforming loans,' which include the size of the mortgage, creditworthiness criteria, down payment requirements, and other factors. Mortgages that meet these criteria are deemed less risky and are eligible for purchase by Fannie Mae.

• Underwriting Guidelines: It also provides specific underwriting guidelines for the loans it is willing to purchase, which has a standardizing effect on the mortgage market, making loan terms more uniform and predictable.

3. Facilitates Lower Mortgage Rates

• Market Scale and Influence: Because of its scale and influence in the market, along with its government-sponsored ties, Fannie Mae can borrow money at near-government rates. This savings is passed on through the lower interest rates offered on loans it buys and securitizes, benefiting homebuyers with more affordable financing options.

• Risk Reduction: By purchasing and guaranteeing mortgages, Fannie Mae reduces the risk faced by lenders, which can lower the interest rates charged to borrowers.

4. Promotes Affordable Housing

• Housing Goals: Fannie Mae is mandated by the U.S. government to promote affordable housing. This includes specific targets for supporting mortgages for low- to moderate-income families, buying mortgages in underserved areas, and financing small multifamily properties.

• Special Programs: It offers a variety of mortgage products and initiatives that support affordable housing, such as the HomeReady mortgage program, which targets creditworthy low-income borrowers by allowing a down payment as low as 3%.

5. Innovation in the Housing Finance

• Technological Advancements: Fannie Mae invests in technology to improve the mortgage process, such as the use of big data and analytics to assess risk, and automated systems to speed up the underwriting process.

• Educational Resources: It provides educational resources to borrowers, helping them understand their mortgage options and the home-buying process, which promotes better financial decisions.

6. Economic Stabilization

• Counter-Cyclical Role: During economic downturns, Fannie Mae plays a critical stabilizing role by continuing to ensure liquidity in the mortgage market, when banks and other private entities may pull back.

• Crisis Response: For instance, during the 2008 financial crisis, Fannie Mae (and Freddie Mac) were taken into conservatorship by the federal government to maintain stability in the housing market, highlighting its essential role in the broader U.S. economy.

Conclusion

Fannie Mae is crucial to the U.S. mortgage system, providing liquidity, standardization, and stability. Its activities support the secondary mortgage market, ensure the availability of mortgage credits, and contribute to better mortgage rates, thereby making homeownership accessible for more Americans. While its operations include certain risks, particularly highlighted during the financial crisis, Fannie Mae’s role in promoting affordable housing and economic stability continues to be vital. The enterprise not only facilitates the functioning of the mortgage market but also drives policy and innovation aimed at fostering a healthy housing market.