What Is Fannie Mae, And Why Should You Care?

By: Kristina Jarczyk


Even if you've only glanced at the headlines about the real-estate market over the past few years, you'll know that Fannie Mae has been a big part of the story.

But what exactly is Fannie Mae, and what does it do? It's not like you see branch offices of it in every city, or receive regular mailers from it urging you to become a customer... so what does it have to do with the average homeowner or would-be buyer?

Quite a bit, actually. In fact, Fannie Mae - together with its two sibling organizations, Freddie Mac and Ginnie Mae - are currently behind some 90 percent of the US's mortgage-backed securities (MBS). Essentially, these three entities currently are the US housing market.

The real name for Fannie Mae is the Federal National Mortgage Association (FNMA, so you can see where the nickname came from). It's been around since 1938, when it was created as part of President Franklin Delano Roosevelt's New Deal, a package of programs aimed at pulling the United States out of the Great Depression.

The idea behind Fannie Mae was to help jumpstart a home-lending industry that had crumbled along with the economy. That way, more people could once again be able to buy their own homes in a down economy.

Fannie Mae got the ball rolling by creating what's called a secondary mortgage market: it didn't make home loans itself, but it bought the mortgage loans made by local banks. That provided those banks with a new injection of funds, so they could turn around and then provide more loans to more homebuyers.

Over the years, Fannie Mae evolved from a 100-percent government entity into a mixed public/private organization and - by 1968 - a full public corporation, complete with CEO and stockholders. However, it's still considered a government-sponsored enterprise, or GSE.

As a GSE, Fannie Mae is able to borrow money from the US Treasury at lower rates than other types of organizations can. That's where it gets the funds to buy mortgages from primary lenders. After buying those mortgages, it then packages many of them into mortgage-backed securities, which are large numbers of individual home loans bundled together for sale to investors (including the central bank of China).

Investors have typically had confidence in those securities because, even after Fannie Mae became a public corporate, it was generally viewed as having the implicit backing of the US government. In other words, if the mortgages in the securities lost value, the investors could still rely on the Treasury to make them whole.

That became a growing problem as the US and global economy fell into recession in 2008. Fannie Mae began feeling the fallout as more and more homeowners - especially those with subprime loans - were unable to keep paying on their mortgages. That meant less money coming in, shrinking profits and plummeting stock prices. By September 2008, the US government stepped in to take over, placing both FannieMae and Freddie Mac into what's called conservatorship, which gives the government legal control over both organizations. And that's where both remain today.

If it sounds like a fiendishly confused and tangled web, it is. (Years before the meltdown, in fact, Motley Fool writer Bill Mann already described Fannie Mae as "unanalyzable.") But the big-picture implications should be obvious: with over $3 trillion in assets as of 2010 and back under US government control, it has a potential impact on almost every homeowner - and taxpayer - in the country. That's why it matters.


Article Source: http://EzineArticles.com/?expert=Kristina_Jarczyk


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