Fannie Mae

Definition

Fannie Mae, officially known as the Federal National Mortgage Association, is a government-sponsored enterprise created to expand the secondary mortgage market by securitizing mortgage loans. By doing so, it enables lenders to reinvest their assets into more lending, thereby increasing the availability and affordability of housing for Americans. This has been particularly influential in suburban expansion and the overall growth of the housing market, while also playing a critical role in the causes of the housing bubble and subsequent financial crisis.

5 Must Know Facts For Your Next Test

1. Fannie Mae was established in 1938 during the Great Depression to promote home ownership and stabilize the housing market after widespread foreclosures.
2. By purchasing mortgages from lenders, Fannie Mae provides them with liquidity, enabling them to make more loans available to potential homebuyers.
3. Fannie Mae's involvement in the housing market has led to increased suburbanization by making financing more accessible for new homes in suburban areas.
4. The company's activities were heavily scrutinized during the 2008 financial crisis when its practices contributed to the housing bubble that ultimately burst.
5. Fannie Mae was placed under conservatorship in 2008 due to significant financial losses stemming from mortgage defaults and declining home prices.

Review Questions

• How did Fannie Mae contribute to suburban expansion and growth in the housing market?
  • Fannie Mae played a crucial role in suburban expansion by making mortgage financing more accessible to middle-class Americans. By purchasing and securitizing mortgages, Fannie Mae provided lenders with additional funds to issue more loans, which led to an increase in home purchases. This accessibility helped fuel growth in suburban developments as families sought affordable housing outside urban centers.
• Discuss how Fannie Mae's practices contributed to the causes of the housing bubble and financial crisis.
  • Fannie Mae's aggressive purchase of mortgage-backed securities, including those backed by subprime loans, contributed significantly to the housing bubble. The demand for these securities incentivized lenders to issue riskier loans to borrowers who may not have qualified otherwise. When housing prices fell and defaults increased, Fannie Mae faced enormous financial losses, exacerbating the conditions that led to the broader financial crisis.
• Evaluate the long-term implications of Fannie Mae's role in both the growth of the housing market and its contribution to economic instability during the financial crisis.
  • Fannie Mae's dual role in promoting housing market growth while also contributing to economic instability highlights the complex relationship between government-sponsored enterprises and market dynamics. On one hand, Fannie Mae's efforts expanded home ownership and supported suburban growth, helping many families achieve their dream of owning a home. On the other hand, its involvement with high-risk lending practices during the housing bubble exposed systemic vulnerabilities that contributed to the financial crisis. The need for regulatory reform has since become a focal point in discussions about ensuring a more stable housing finance system in the future.

Related terms

Freddie Mac: Freddie Mac, or the Federal Home Loan Mortgage Corporation, is another government-sponsored enterprise that provides liquidity, stability, and affordability to the housing market by purchasing and securitizing mortgages.

Mortgage-Backed Securities: Mortgage-backed securities are investment products created by pooling together a group of mortgages and selling them as a single security to investors, allowing for the transfer of risk and providing capital for more home loans.

Subprime Mortgages: Subprime mortgages are loans offered to borrowers with less-than-perfect credit histories, often carrying higher interest rates due to the increased risk of default.