Fannie Mae

Definition

Fannie Mae, or the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) created to expand the secondary mortgage market in the United States. By purchasing and securitizing mortgages, Fannie Mae provides liquidity and stability to the housing market, enabling lenders to offer more loans and making homeownership accessible for more Americans. This mechanism helps lower mortgage rates and encourages home buying and refinancing, which ultimately supports the overall economy.

5 Must Know Facts For Your Next Test

1. Fannie Mae was established in 1938 as part of the New Deal to help stimulate the housing market during the Great Depression.
2. The agency does not lend money directly to consumers; instead, it buys loans from lenders, which helps them replenish their capital and make more loans.
3. Fannie Mae plays a crucial role in setting underwriting standards that ensure borrowers meet specific requirements before their loans can be purchased.
4. During the financial crisis of 2008, Fannie Mae was placed under conservatorship by the Federal Housing Finance Agency (FHFA) to stabilize its operations.
5. Fannie Mae's activities are vital for maintaining low mortgage interest rates, as its operations help ensure a steady flow of funds into the housing market.

Review Questions

• How does Fannie Mae impact the availability of mortgage loans for homebuyers?
  • Fannie Mae impacts the availability of mortgage loans by purchasing loans from lenders, which provides them with liquidity. This process allows lenders to free up their capital so they can offer more loans to potential homebuyers. As a result, Fannie Mae helps increase access to mortgage financing and contributes to overall affordability in the housing market.
• Discuss how Fannie Mae contributes to the stabilization of the housing market during economic downturns.
  • Fannie Mae contributes to the stabilization of the housing market during economic downturns by providing a continuous source of funding for mortgage loans. When traditional sources of credit tighten, Fannie Mae's role as a secondary market buyer helps maintain liquidity in the housing sector. This support prevents drastic declines in home prices and ensures that borrowers can still access financing options even in challenging economic conditions.
• Evaluate the consequences of Fannie Mae's conservatorship during the financial crisis of 2008 on its future operations and policies.
  • The conservatorship of Fannie Mae during the financial crisis of 2008 significantly altered its operations and policies moving forward. Under the oversight of the Federal Housing Finance Agency (FHFA), Fannie Mae implemented stricter underwriting standards and increased its focus on risk management to prevent similar issues from arising in the future. This change aimed to restore confidence in its role within the housing finance system while also addressing concerns about taxpayer exposure. The experience led to ongoing discussions about reforming GSEs like Fannie Mae to enhance their stability and reduce systemic risk in the housing market.

Related terms

Freddie Mac:

Freddie Mac, or the Federal Home Loan Mortgage Corporation, is another GSE that operates alongside Fannie Mae to provide liquidity and stability in the housing finance system by purchasing and securitizing mortgages.

Mortgage-Backed Securities (MBS): Mortgage-Backed Securities are investment products created by pooling together various mortgages and selling shares to investors, allowing Fannie Mae and Freddie Mac to finance home loans.

Conventional Loan: A Conventional Loan is a type of mortgage that is not insured or guaranteed by a government agency, often meeting the criteria set by Fannie Mae and Freddie Mac for purchase.