Fannie Mae

Definition

Fannie Mae, officially known as the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) that was established to expand the secondary mortgage market in the United States. By providing liquidity, stability, and affordability to the mortgage market, Fannie Mae plays a crucial role in increasing homeownership rates and supporting the housing finance system.

5 Must Know Facts For Your Next Test

1. Fannie Mae was created in 1938 during the Great Depression as part of the New Deal to stimulate the housing market and make home loans more accessible.
2. It operates primarily by purchasing mortgages from lenders, which helps them maintain liquidity and allows them to offer more loans to borrowers.
3. Fannie Mae is required by law to support affordable housing initiatives, promoting homeownership among low- and moderate-income families.
4. In 2008, Fannie Mae was placed under conservatorship due to significant losses linked to the subprime mortgage crisis, which raised concerns about its stability and impact on the housing market.
5. Fannie Mae's activities significantly influence mortgage interest rates and overall housing market conditions, as it is one of the largest players in the secondary mortgage market.

Review Questions

• How did Fannie Mae contribute to increasing homeownership rates in the United States since its inception?
  • Fannie Mae has played a pivotal role in increasing homeownership rates in the United States by providing liquidity to lenders. By purchasing mortgages from banks and other financial institutions, Fannie Mae enables these lenders to have more capital available for additional loans. This process ultimately helps more Americans access affordable home financing options, particularly during periods of economic downturn when credit may be less accessible.
• Discuss the impact of Fannie Mae's conservatorship in 2008 on the broader financial system.
  • The conservatorship of Fannie Mae in 2008 had significant implications for the broader financial system. It raised concerns about systemic risk and highlighted vulnerabilities within the housing finance sector. As Fannie Mae is a major player in mortgage-backed securities, its instability had ripple effects throughout financial markets, leading to tighter lending standards and increased scrutiny of government-sponsored enterprises. This event underscored the interconnectedness of Fannie Mae's operations with overall economic health and housing market stability.
• Evaluate the long-term implications of Fannie Mae's policies on affordable housing initiatives and their effectiveness in addressing housing inequality.
  • Fannie Mae's policies aimed at supporting affordable housing initiatives have long-term implications for addressing housing inequality in the U.S. By focusing on making homeownership accessible to low- and moderate-income families, these initiatives are designed to bridge gaps in housing affordability. However, evaluating their effectiveness requires considering factors such as regional variations in housing markets and ongoing challenges related to income disparity. The balance between promoting affordable housing while managing risks within the mortgage market is critical for ensuring that these initiatives truly benefit those most in need.

Related terms

Freddie Mac: Freddie Mac, or the Federal Home Loan Mortgage Corporation, is another government-sponsored enterprise similar to Fannie Mae that also operates in the secondary mortgage market.

Mortgage-Backed Securities (MBS): Mortgage-backed securities are financial instruments created by bundling together multiple mortgages and selling them to investors, which Fannie Mae frequently does to raise capital.

Government-Sponsored Enterprise (GSE): A government-sponsored enterprise is a financial services corporation created by Congress to enhance the flow of credit to specific sectors of the economy, including housing finance in the case of Fannie Mae.