The Role of Fannie Mae in Real Estate Financing

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, you will learn about the history and structure of Fannie Mae. We will also cover the role Fannie Mae plays in the field of real estate financing. A short quiz follows.

History of Fannie Mae

Fannie Mae? What does a sweet old grandmother have to do with buying a house? Am I getting an inheritance I didn't know about? That would help a lot with buying a house. Alas, she isn't that exciting. She's not even a person or a rich benefactor. So what is Fannie Mae, anyway?

Fannie Mae is the common name for the Federal National Mortgage Association (FNMA). It was founded in 1938 during the Great Depression as part of the New Deal economic revitalization program. This program sought to increase mortgage lending and home ownership. In 1968, it became a publicly traded company.

The Housing and Community Development Act of 1992 placed a legal obligation on Fannie Mae to increase lending to low- and moderate-income households. Throughout the 90s, political policy drove up the allowable proportion of these loans. Fannie Mae gradually purchased riskier mortgages, many of which included financing with temporary teaser rates or high balloon payments. Borrowers with low credit scores soon became unable to repay.

The U.S. subprime lending crisis led to the to the September 2008 decision by the Federal Housing Finance Agency (FHFA) to place Fannie Mae into government conservatorship. FHFA control came with major capital infusions from the U.S. Treasury and Federal Reserve. These actions bailed out Fannie Mae from the losses of unpaid loans, and as a result, conservatorship introduced more restrictive lending rules.

Structure

Fannie Mae is a unique kind of business called a government-sponsored enterprise (GSE), which is a business established by act of Congress. Before the subprime lending crisis, stock shares were traded on the New York Stock Exchange (NYSE). However, after the bailouts and conservatorship, the organization was delisted from the NYSE. Today, Fannie Mae stock is traded on the Over-the-Counter Bulletin Board (OTCBB), which is a different type of stock trading service that is regulated by the National Association of Securities Dealers (NASD).

Role in Real Estate Financing

Fannie Mae facilitates the secondary mortgage market. A strong secondary market provides lenders the opportunity to easily resell the mortgages they originate. Lenders then have the funds to create more loans. Without a secondary market, they would have to keep the mortgages on their own books. This ties up funds, limiting the ability to make more loans.

Lenders make loans that comply with Fannie Mae standards. The rules include conforming loan limits on the amount of the mortgage and requiring a minimum amount of equity or mortgage insurance. These rules reduce the risk of investors losing money in case of foreclosure. Uniformity makes it simple to package mortgages together as investment products, which Fannie Mae bundles together as mortgage-backed securities (MBS).

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