About Fannie Mae

Fannie Mae (the Federal National Mortgage Association) (NYSE:FNMA) is an American government corporation which has provided security for mortgage investors since its creation during the Great Depression. Along with another government enterprise, Freddie Mac (the Federal Home Loan Mortgage Corporation), it provides insurance for the majority of home mortgages in the United States today.

In its original form, after its creation in 1938, Fannie Mae was intended as a way to provide stability for the mortgage industry in the U.S. It would purchase, package, and resell mortgage loans so that the original creditors would recoup their money quickly and go on to facilitate new mortgages. It was reorganized in the 1960s as a publicly traded (i.e. private) corporation, and then split into one organization which retained the name Fannie Mae (the current organization) and a second, the Government National Mortgage Association (Ginnie Mae) to support mortgages insured by the Veterans Administration and the Farmers Home Administration. Once it went private, Fannie Mae also started purchasing private mortgages, whereas it previously had restricted itself to mortgages insured by another Depression-era government enterprise, the Federal Housing Administration (FHA).

The current function of Fannie Mae is to facilitate the securitization of mortgages. It purchases loans from mortgage sellers, promising interest plus repayment of the principal. The mortgage seller can then either hold its security (the assurance of payment from Fannie Mae), or sell it to others on the open market. In theory, Fannie Mae only accepts loans provided that they meet, or conform to, certain pre-established standards. It generates income from the difference between the interest rate it pays back to mortgage sellers, and the real interest rate produced by the investments themselves (or, alternatively, it can lose money when the interest produced by the investments fall below the rate Fannie Mae promised in order to obtain them).

Because of their function as buyer and seller of mortgage-backed securities, the 2007-2008 subprime mortgage crisis hit Fannie Mae and Freddie Mac as hard as any of the private banks. In September 2008, the same month that Lehman Brothers went under, both Fannie Mae and Freddie Mac were placed in conservatorship, meaning they were essentially insolvent and were taken over by the government. Previously, the government had not explicitly guaranteed that it would bail out these organizations, but investors in the market had generally assumed that a guarantee from Fannie Mae was nearly as good as a guarantee direct from the U.S. government itself. During the takeover, the American federal government brought hundreds of billions of dollars in potential liabilities from the mortgage organizations onto its own books.

Prior to the takeover, shares were bought and sold in Fannie Mae, and preferred shares were held by a large number of private banks in the country. Since 2008, no dividends are paid on these shares, and they have been ranked junior to federal stock in the company pending restructuring. At the time of the takeover, this federal stock was pegged at 80% of the company’s total value. In the summer of 2010, it was also announced that both enterprises would have their stock delisted, meaning it will no longer be traded on the New York Stock Exchange (where Fannie Mae shares were traded under the ticker FNMA).