Federal National Mortgage Association (Fannie Mae)

Definition

The Federal National Mortgage Association, commonly known as Fannie Mae, is a government-sponsored enterprise created to expand the secondary mortgage market in the United States. Fannie Mae plays a crucial role in increasing the availability of affordable housing by purchasing mortgages from lenders, thereby providing them with liquidity to issue more loans. This mechanism helps stabilize the housing market and ensures that individuals and families have access to home financing options.

5 Must Know Facts For Your Next Test

1. Fannie Mae was established in 1938 as part of the New Deal legislation to combat the Great Depression and promote home ownership in America.
2. The organization primarily buys conventional loans, which are not insured or guaranteed by the federal government, but also works with FHA and VA loans.
3. Fannie Mae helps lenders manage risk by allowing them to sell loans to the agency, providing immediate capital for new loans and helping maintain a steady flow of credit in the housing market.
4. During the 2008 financial crisis, Fannie Mae faced significant losses due to rising mortgage defaults, leading to its conservatorship under the Federal Housing Finance Agency.
5. Fannie Mae has contributed to policies that aim to increase access to housing finance for underserved communities, thereby promoting social equity in housing markets.

Review Questions

• How does Fannie Mae influence the availability of affordable housing in the United States?
  • Fannie Mae influences affordable housing availability by purchasing mortgages from lenders, which provides them with liquidity to issue more loans. This process encourages lenders to offer more financing options to potential homebuyers, particularly those with limited means. By stabilizing the housing market through these actions, Fannie Mae plays a significant role in ensuring that more individuals and families can access homeownership opportunities.
• Discuss the impact of Fannie Mae's involvement in the mortgage market on both lenders and borrowers.
  • Fannie Mae's involvement in the mortgage market has a dual impact. For lenders, it offers a reliable way to manage risk by selling their mortgages, which frees up capital for new loans and encourages more lending activity. For borrowers, this means increased access to credit and potentially lower interest rates, as Fannie Mae's participation creates a more competitive market. Overall, Fannie Mae contributes positively to both lender stability and borrower accessibility.
• Evaluate the consequences of Fannie Mae's conservatorship during and after the 2008 financial crisis and its implications for future federal housing policy.
  • The conservatorship of Fannie Mae during the 2008 financial crisis had far-reaching consequences for both the organization and federal housing policy. The government's intervention aimed to stabilize the housing market and prevent further economic collapse, but it also raised questions about the sustainability of Fannie Mae's business model and its risk management practices. Moving forward, policymakers have been compelled to rethink how GSEs operate within the housing finance system, leading to discussions about reforming their structure, ensuring better oversight, and balancing access to affordable housing while managing systemic risk.

Related terms

Government-Sponsored Enterprise (GSE): A financial services corporation created by Congress to enhance the flow of credit to specific sectors of the economy, such as housing and agriculture.

Mortgage-Backed Securities (MBS): Investment products that are backed by a pool of mortgage loans, which can provide investors with income from the payments made by borrowers.

Federal Housing Administration (FHA): A government agency that provides mortgage insurance on loans made by approved lenders to borrowers with low to moderate incomes, aiming to facilitate home ownership.