Fannie Maeis a term that is commonly associated with mortgages and loans. Although the term is commonly heard and used, not many are aware of what Fannie Mae is exactly. Fannie Mae is a nickname for the Federal National Mortgage Association. It is a government-sponsored business that was founded by Congress in 1938. The year 1938 came with a great depression in the country. Fannie Mae became a great addition to the economy as a part of the New Deal act. It was founded to establish a stable housing market allowing for more manageable mortgages and making it possible for low income earners to own a home. Fannie Mae is responsible for purchasing mortgages on the secondary housing market. The association also has a relative, the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). Below are more details to get you more familiar with Fannie Mae and what the association can do for you.
The Creation of Liquidity
Fannie Mae presents higher liquidity for the financial institute that is offering the housing loan. This allows them to fund even more mortgages. Since 2009, $4.2 trillion in liquidity has been provided for the housing market. However, there are mandatory criteria that must be met in order for the creation of liquidity to work. All lending practices must be ethical and no short cuts can be taken. Subprime and prime rates are also given out in order for a mortgage to be supported by Fannie Mae. Subprime loans usually have high rates when compared to prime rate loans. Borrowers that have bad credit are typically good candidates for prime rate loans.
MBS: Mortgage-Backed Securities
After mortgages are bought on the secondary market, Fannie Mae groups them to create mortgage-backs securities, or MBS. Mortgage-backed securities are secured by either one mortgage or a group of mortgages. These MBS are bought by different institutions, like banks, pension funds, insurance companies, and other specific financial institutions that deal closely with the housing market. MBS also ensures principal payments are made, and that all interest is paid as well. Fannie Mae also has a portfolio that is maintained by investing in its own mortgage-backed securities, as well as the MBS of other institutions, and by issuing a debt called an agency debt.
The Financial Crisis
Fannie Mae has been a freely traded association ever since 1968. However, in 2010 it was traded on the stock market. Soon after the financial crisis had hit the country, it was removed from the stock exchange list because its stock value had dropped tremendously and no longer met the requirements needed to stay on the stock market list. The association is now considered an over-the-counter trade.
The cause of the crisis is lending procedures that were carried out unethically. During the rise in housing demands that took place in the mid-2000s, financial institutions that specialized in giving mortgage loans lowered their qualifications for obtaining a loan. They also offered loans to potential homeowners whose credit was not good enough to get the loan in the first place. In 2007, the housing bubble collapsed and many of the homeowners who had borrowed the money had their loans in default. This lead to what was called the subprime meltdown, which affected credit scores of many homebuyers and created the most devastating recession to have occurred in America in years.
The Government Rescues Fannie Mae
At the ending of 2008, Fannie Mae and its counterpart were taken into the hands of the government by way of conservatorship. Both associations were rescued by the government giving a bailout of $187.4 billion. This amount saved the associations from going under. Since the bailout, the total amount that Fannie Mae has repaid the government has exceeded the amount that was used by the government to bail out the association.
Immediately following the meltdown that occurred in the housing market, Fannie Mae quickly began focusing on modifying loans. The act of modifying loans changes the conditions of a current mortgage in an attempt to assist borrowers from defaulting on any of their mortgage payments, which could lead to a foreclosure on their home. Whenever Fannie Mae modifies loans, interest rate of mortgages is lowered by giving the loan an extension. In return, house payments are lowered. Fannie Mae is responsible for modifying over 1.5 million loans since the year 2009.
In conclusion, Fannie Mae is an association that has become a savior for the housing market. Its abilities to assist the nation with its liquidation creation and loan modifications have enabled homebuyers with low incomes to be able to obtain lower and affordable rates. Even in a time of struggle, Fannie Mae has been able to regain strength after suffering in 2008. Now when you see or hear the term Fannie Mae, you now know that it is the association that can be counted on to aid you in purchasing your first home.