What is Fannie Mae?
Fannie Mae, i.e., Federal National Mortgage Association is a United States government-sponsored enterprise (GSE) which was founded in the year 1938 by congress to boost the secondary mortgage market during the great depression which involves financing for the mortgage lenders thereby providing access to affordable mortgage financing in all the markets at all times.
Fannie Mae is the leading source of mortgage financing in the United States. They serve the people who want to buy a house in America. Their primary purpose is to ensure that the owners, buyers, and renters of houses across the country get access to affordable financing opportunities and their mission is to provide innovative, stronger, and safer & efficient systems of housing finance. It aims to provide liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses. to the massive number of banks and mortgage companies that lend their money to finance housing by investing in the mortgage market and also by pooling loans into mortgage-backed securities.
How Does it Work?
Fannie Mae targets the mortgage brokersMortgage BrokersA mortgage broker is an intermediary that liaisons between the mortgage borrower and mortgage lender. Such brokers are responsible for gathering information, documentation process concerning income earned, an asset owned, credit report, and employment details to assess the borrower's ability to secure financing., banks, and credit unions for the purchase of mortgages and converts the risk associated with the lending from lending financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. to the entity. This process of purchase of mortgages results in more liquidity, and hence this gives rise to more and more options for the underwriting of other mortgages. There are stringent criteria for the selection of mortgage lenders who can sell their securities to Fannie Mae. There are also many types of similar packages like pension funds, hedge fundsHedge FundsTo work in a hedge fund, an individual must fulfill the necessary educational and skill requirements, obtain a master's degree such as the CFA or CAIA, and gain knowledge of the industry through internships at hedge funds., endowment funds offered by the agency to the market.
They own the underlying securities even after the sale of the mortgage-backed securities to the investors. The share of the monthly mortgage payment is also shared with the investors on a pro-rata basis. Various criteria include various parameters for middle-income families.
During the time of the Great Depression, almost a quarter of the county’s homeowners lost their houses and at those time banks were not having sufficient funds to provide bank loans. At that time U.S. Congress created Fannie Mae to help the bankers finance mortgage home loans, namely long-term and fixed-rate loans which expanded access to affordable house loans and bought changes to the housing industry. They used the strategies of buying and guarantee in the secondary mortgage markets, issued by the lenders instead of servicing their mortgages in the market.
Till the year the 1990s, there was a monopolyMonopolyMonopoly is the “one-&-only” seller of a good or service in the market & it faces no competition from any other entity. Generally, it is controlled or monitored by the Government to safeguard the customers’ interests. of these two companies in the secondary mortgage market. There was also growing competition from conventional companies because of the growth of federal regulation and new regulation. But, there was still a dominance of Fannie Mae and Freddie Mac in the secondary market.
When there was a great depression in the market, there was much default from the borrower’s side, and due to this, banks found themselves very strapped for cash and other funds. Hence, to avoid such a situation of cash deficit, the government introduced the above two companies in the year 1938.
Difference between Fannie Mae and Freddie Mac
There are many similarities between Fannie Mae and Freddie Mac. However, if we talk about the differences, the significant difference is in the target market. The main target market for Fannie Mae is the large commercial lenders from which it buys the mortgages, whereas the target for Freddie Mac is the smaller banks from which it buys the mortgages.
Also, there is a difference in the level of income of the lenders. People who earn 80% or less of the area’s median income can get the Home ready loan from Fannie Mae. However, Freddie Mac offers Home possible programs that lend or even who cannot earn more than the area’s average income and also who live in the home.
This article has been a guide to what is Fannie Mae and its definition. Here we discuss how does it work along with its history and differences from Freddie Mac. You may learn more about financing from the following articles –