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117-626: The Federal National Mortgage Association ( FNMA ), commonly known as Fannie Mae , is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company . Founded in 1938 during the Great Depression as part of the New Deal , the corporation's purpose is to expand the secondary mortgage market by securitizing mortgage loans in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing

234-514: A 30-year fixed-rate mortgage with a low down payment ... and the continuous availability of mortgage credit under a wide range of economic conditions". Then in 2003–2004, the subprime mortgage crisis began. The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization (PLS) conduits, typically operated by investment banks. As loan originators began to distribute more and more of their loans through private label PLS's,

351-775: A central role in the US housing finance system". The U.S. Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels. Each week Freddie Mac publishes

468-605: A central role in the US housing finance system". The US Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels. On July 11, 2008, The New York Times reported that U.S. government officials were considering

585-491: A fair-value basis using guidelines set forth by the Financial Accounting Standards Board . The changes made by the bill would mean that Fannie Mae and Freddie Mac were counted on the budget instead of considered separately and would mean that the debt of those two programs would be included in the national debt. These programs themselves would not be changed, but how they are accounted for in

702-498: A global scale. The Administration PR effort was not enough, by itself, to save the GSEs. Their government directive to purchase bad loans from private banks, in order to prevent these banks from failing, as well as the 20 top banks falsely classifying loans as AAA, caused instability. Paulson's plan was to go in swiftly and seize the two GSEs, rather than provide loans as he did for AIG and the major banks; he told president Bush that "the first sound they hear will be their heads hitting

819-472: A government organization, guarantees FHA-insured mortgage loans as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages. As such, Ginnie Mae is the only home-loan agency explicitly backed by the full faith and credit of the United States government. In 1970, the federal government authorized Fannie Mae to purchase conventional loans, i.e. those not insured by

936-463: A limit on the maximum sized loan they will guarantee. This is known as the "conforming loan limit". The conforming loan limit for Fannie Mae, along with Freddie Mac, is set by Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of both GSEs. OFHEO annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage

1053-468: A liquid secondary mortgage market and thereby made it possible for banks and other loan originators to issue more housing loans, primarily by buying Federal Housing Administration (FHA) insured mortgages. For the first thirty years following its inception, Fannie Mae held a monopoly over the secondary mortgage market. Other considerations may have motivated the New Deal focus on the housing market: about

1170-508: A loan is conforming; Fannie Mae followed this program up in 2004 with Custom DU, which allows lenders to set custom underwriting rules to handle nonconforming loans as well. The secondary market for nonconforming loans includes jumbo loans , which are loans larger than the maximum that Fannie Mae and Freddie Mac will purchase. In early 2008, the decision was made to allow TBA (To-be-announced)-eligible mortgage-backed securities to include up to 10% "jumbo" loans. Fannie Mae and Freddie Mac have

1287-422: A loan-to-values over 80% without mortgage insurance or a repurchase agreement with the lender; however, in 2006 and 2007 Fannie Mae did purchase subprime and Alt-A loans as investments. Fannie Mae is a purchaser of mortgages loans and the mortgages that secure them, which it packages into mortgaged-backed securities (MBS). Fannie Mae buys loans from approved mortgage sellers and securitizes them; it then sells

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1404-488: A majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA "implicitly taxpayer-backed agencies". The Economist has referred to "the implicit government guarantee" of FHLMC and FNMA. The then director of the Congressional Budget Office , Dan L. Crippen, testified before Congress in 2001, that

1521-543: A mortgage is considered a jumbo loan . The conforming loan limit is 50 percent higher in such high-cost areas as Alaska , Hawaii , Guam and the US Virgin Islands , and is also higher for 2–4 unit properties on a graduating scale. Modifications to these limits were made temporarily to respond to the housing crisis, see jumbo loan for recent events. The FHLMC states, "securities, including any interest, are not guaranteed by, and are not debts or obligations of,

1638-558: A national average of mortgage rates called the Primary Mortgage Market Survey (PMMS). The PMMS tracks a constant borrower profile of conventional, conforming fully-amortizing home purchase loans with 20% down and excellent credit borrowers. Rates are published for the most popular mortgage products, the 30-year and 15-year fixed-rate. Rates are released each week on Thursdays. The PMMS began in April 1971 with

1755-440: A percent). Indeed, in 2008, since the demand for bonds not guaranteed by GSEs was almost non-existent, non-conforming loans were priced nearly 1% to 1.5% higher than conforming loans. Originally, Fannie had an 'explicit guarantee' from the government; if it got in trouble, the government promised to bail it out. This changed in 1968. Ginnie Mae was split off from Fannie. Ginnie retained the explicit guarantee. Fannie, however, became

1872-492: A plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisis. Fannie Mae and smaller Freddie Mac owned or guaranteed a massive proportion of all home loans in the United States and so were especially hard hit by the slump. The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $ 5 trillion on debt owned or guaranteed by

1989-476: A precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get loans. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play

2106-480: A precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play

2223-614: A private corporation, chartered by Congress and with a direct line of credit to the US Treasury. It was its nature as a Government Sponsored Enterprise (GSE) that provided the 'implied guarantee' for their borrowing. The charter also limited their business activity to the mortgage market. In this regard, although they were a private company, they could not operate like a regular private company. Fannie Mae received no direct government funding or backing; Fannie Mae securities carried no actual explicit government guarantee of being repaid. This

2340-575: A shift toward riskier mortgages and private label MBS distribution. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in

2457-700: A third of the nation's unemployed were in the building trade, and the government had a vested interest in getting them back to work by giving them homes to build. Fannie Mae was acquired by the Housing and Home Finance Agency from the Federal Loan Agency as a constituent unit in 1950. In 1954, an amendment known as the Federal National Mortgage Association Charter Act made Fannie Mae into "mixed-ownership corporation", meaning that federal government held

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2574-698: A total of $ 136.4 billion in payments to the Treasury. On May 11, 2015 The Wall Street Journal reported that A U.S. District Court judge said Nomura Holdings Inc. was not truthful in describing mortgage-backed securities sold to Fannie Mae and Freddie Mac , giving a victory to the companies' conservator, the Federal Housing Finance Agency (FHFA). Judge Denise Cote asked the FHFA to propose updated damages to be paid by Nomura and co-defendant RBS Securities Inc. , which underwrote some of

2691-470: A total of US$ 10.7 trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks. On June 16, 2010, Fannie Mae and Freddie Mac announced their stocks would be delisted from the NYSE. The Federal Housing Finance Agency directed the delisting after Fannie's stock traded below $ 1 a share for over 30 days. Since then the stocks have continued to trade on

2808-596: A traditional survey approach, Freddie Mac transitioned to replacing lender survey responses with actual loan application data submitted by lenders to Freddie Mac's automated underwriting system . Data is collected from the previous Thursday until the Wednesday before the publication date. Changes in PMMS rates are widely reported in national media. * Interim As of March 2024. In 2003, Freddie Mac revealed that it had understated earnings by almost $ 5 billion, one of

2925-536: Is a financial and accounting term for the difference between the duration of assets and liabilities, and is typically used by banks, pension funds, or other financial institutions to measure their risk due to changes in the interest rate. "The company said that in April its average duration gap widened to plus 3 months in April from zero in March." "The Washington-based company aims to keep its duration gap between minus 6 months to plus 6 months. From September 2003 to March,

3042-475: Is a type of financial services corporation created by the United States Congress . Their intended function is to enhance the flow of credit to targeted sectors of the economy, to make those segments of the capital market more efficient and transparent, and to reduce the risk to investors and other suppliers of capital. The desired effect of the GSEs is to enhance the availability and reduce

3159-790: Is considerably weaker than that which governs other large, complex financial institutions." The legislation met with opposition from both Democrats and Republicans at that point and the Senate never took up the House passed version for consideration after that. Following their mission to meet federal Housing and Urban Development (HUD) housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) had striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain

3276-498: Is considered a non-conforming jumbo loan . The conforming loan limit is 50 percent higher in Alaska and Hawaii. The GSEs only buy loans that are conforming to repackage into the secondary market, lowering the demand for non-conforming loans. By virtue of the law of supply and demand, then, it is harder for lenders to sell these loans in the secondary market; thus these types of loans tend to cost more to borrowers (typically 1/4 to 1/2 of

3393-539: The Budget and Accounting Transparency Act of 2014 (H.R. 1872; 113th Congress) into the United States House of Representatives during the 113th United States Congress . The bill, if it were passed, would modify the budgetary treatment of federal credit programs, such as Fannie Mae and Freddie Mac. The bill would require that the cost of direct loans or loan guarantees be recognized in the federal budget on

3510-541: The Democratic National Convention have not yet submitted their filings on how much they received from Freddie Mac and Fannie Mae. On September 7, 2008, Federal Housing Finance Agency (FHFA) Director James B. Lockhart III announced pursuant to the financial analysis, assessments and statutory authority of the FHFA, he had placed Fannie Mae and Freddie Mac under the conservatorship of the FHFA. FHFA has stated that there are no plans to liquidate

3627-640: The Federal Home Loan Mortgage Corporation (Freddie Mac) had owned or guaranteed about half of the U.S.'s $ 12 trillion mortgage market (equivalent to $ 16,680,000,000,000 in 2023). If they were to collapse, mortgages would be harder to obtain and much more expensive. Fannie and Freddie bonds were owned by everyone from the Chinese government , to money market funds , to the retirement funds of hundreds of millions of people. If they went bankrupt there would be mass upheaval on

Fannie Mae - Misplaced Pages Continue

3744-493: The Federal National Mortgage Association (Fannie Mae) was the sole institution that bought mortgages from depository institutions, principally savings and loan associations, which encouraged more mortgage lending and effectively insured the value of mortgages by the US government. In 1968, Fannie Mae split into a private corporation and a publicly financed institution. The private corporation

3861-646: The GSEs "have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return". For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE

3978-576: The Office of Federal Housing Enterprise Oversight , issued the results of a 27-month-long investigation. On May 25, 2006, Senator McCain joined as a co-sponsor to the Federal Housing Enterprise Regulatory Reform Act of 2005 (first put forward by Sen. Chuck Hagel) where he pointed out that Fannie Mae and Freddie Mac's regulator reported that profits were "illusions deliberately and systematically created by

4095-713: The Over-the-Counter Bulletin Board . In May 2013, Fannie Mae announced that it is going to pay a dividend of $ 59.4 billion (equivalent to $ 76,620,000,000 in 2023) to the United States Treasury. In 2014, gross flows were: Fannie Mae's 2014 financial results enabled it to pay $ 20.6 billion in dividends to Treasury for the year, resulting in a cumulative total of $ 134.5 billion in dividends through December 31, 2014 – approximately $ 18 billion more than Fannie Mae received in support. As of March 31, 2015, Fannie Mae expects to have paid

4212-457: The "debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee." The FHLMC receives no direct federal government aid. However, the corporation and the securities it issues are thought to benefit from government subsidies. The Congressional Budget Office writes, "There have been no federal appropriations for cash payments or guarantee subsidies. But in

4329-525: The 1989 to 2008 time period include five Republicans and five Democrats. Top recipients of PAC money from these organizations include Roy Blunt (R-MO) $ 78,500 (total including individuals' contributions $ 96,950), Robert Bennett (R-UT) $ 71,499 (total $ 107,999), Spencer Bachus (R-AL) $ 70,500 (total $ 103,300), and Kit Bond (R-MO) $ 95,400 (total $ 64,000). The following Democrats received mostly individual contributions from employees, rather than PAC money: Christopher Dodd , (D-CT) $ 116,900 (but also $ 48,000 from

4446-468: The 30-year fixed-rate average and the 1-year ARM and 15-year fixed-rate products were added in 1984 and 1991 respectively. In January 2005, the 5/1 hybrid ARM was added and it was discontinued in November 2022. In January 2016, the 1-year ARM was discontinued. Prior to November 2022, the PMMS collected data by surveying lenders across a proportional mix of lending institutions. Following challenges using

4563-519: The FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%. The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for greater returns in good times, but put

4680-471: The FHA, VA, or FmHA, and created the Federal Home Loan Mortgage Corporation (FHLMC), colloquially known as Freddie Mac, to compete with Fannie Mae and thus facilitate a more robust and efficient secondary mortgage market. That same year FNMA went public on New York and Pacific Exchanges. In 1981, Fannie Mae issued its first mortgage pass-through and called it a mortgage-backed security . Ginnie Mae had guaranteed

4797-453: The FHFA, which alleged that the companies lied about the quality of the loans underlying the securities. During the nonjury trial, lawyers for the FHFA said that Nomura and RBS inflated values of homes behind some mortgages and sometimes said a home was owner-occupied when it was not. Fannie Mae makes money partly by borrowing at low rates, and then reinvesting its borrowings into whole mortgage loans and mortgage backed securities. It borrows in

Fannie Mae - Misplaced Pages Continue

4914-571: The Federal Housing Enterprise Regulatory Reform Act of 2005. The bill was sponsored and introduced in the Senate on January 26, 2005 by Senator Chuck Hagel (R–NE) and co-sponsored by Senators Elizabeth Dole (R–NC) and John Sununu (R–NH). The S. 190 bill was reported out of the Senate Banking Committee on July 28, 2005, but never voted on by the full Senate.   On May 23, 2006, the Fannie Mae and Freddie Mac regulator,

5031-625: The GSEs guaranteed the performance of their MBS, private securitizers generally did not, and might only retain a thin slice of risk. Additionally, Freddie Mac was bound by underwriting guidelines, limiting them to only purchasing conforming loans that required certain debt-to-income and loan-to-value ratios, in addition to other metrics. From 2001 to 2003, financial institutions experienced high earnings due to an unprecedented re-financing boom brought about by historically low interest rates. When interest rates eventually rose, financial institutions sought to maintain their elevated earnings levels with

5148-727: The GSEs guaranteed the performance of their mortgage-backed securities (MBSs), private securitizers generally did not, and might only retain a thin slice of risk. Often, banks would offload this risk to insurance companies or other counterparties through credit default swaps , making their actual risk exposures extremely difficult for investors and creditors to discern. The shift toward riskier mortgages and private label MBS distribution occurred as financial institutions sought to maintain earnings levels that had been elevated during 2001–2003 by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding

5265-432: The GSEs lost the ability to monitor and control loan originators. Competition between the GSEs and private securitizers for loans further undermined GSEs' power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas

5382-566: The GSEs operate. GSEs hold or pool approximately $ 5 trillion worth of mortgages. The U.S. Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts into circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities. Congress established GSEs to improve

5499-716: The Obama presidential campaign have been determined to be false; James Johnson, former aide to Democratic Vice-President Walter Mondale and ex-head of Obama's Vice-Presidential Selection Committee, CEO from 1991 to 1998; and Jamie Gorelick , former Deputy Attorney General to President Clinton, and Vice-Chairman from 1998 to 2003. In his position, Johnson earned an estimated $ 21 million; Raines earned an estimated $ 90 million; and Gorelick earned an estimated $ 26 million. Three of these four top executives were also involved in mortgage-related financial scandals. The top 10 recipients of campaign contributions from Freddie Mac and Fannie Mae during

5616-521: The PACs), John Kerry , (D-MA) $ 109,000 ($ 2,000 from PACs), Barack Obama , (D-IL) $ 120,349 (only $ 6,000 from the PACs), Hillary Clinton , (D-NY) $ 68,050 (only $ 8,000 from PACs). John McCain received $ 21,550 from these GSEs during this time, mostly individual money. Freddie Mac also contributed $ 250,000 to the 2008 Republican National Convention in St. Paul, Minnesota according to FEC filings. The organizers of

5733-892: The Sveriges Riksbank Prize in Economic Sciences, has called FHLMC and FNMA "implicitly taxpayer-backed agencies". The Economist has referred to "the implicit government guarantee" of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae's (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail. Fannie Mae and Freddie Mac were allowed to hold less capital than normal financial institutions: e.g., they were allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions. Regulations exist through

5850-443: The Treasury Department to own stock. This event also renewed calls for stronger regulation of GSEs by the government. President Bush recommended a significant regulatory overhaul of the housing finance industry in 2003, but many Democrats opposed his plan, fearing that tighter regulation could greatly reduce financing for low-income housing, both low- and high-risk. Bush opposed two other acts of legislation:[1][2] Senate Bill S. 190,

5967-617: The U.S.'s $ 12 trillion mortgage market. This made both corporations highly susceptible to the subprime mortgage crisis of that year. Ultimately, in July 2008, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The US Treasury Department and the Federal Reserve took several steps to bolster confidence in the corporations, including extending credit limits, granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks), and potentially allowing

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6084-409: The United States housing and credit markets flexibility and liquidity. In order for Fannie Mae to provide its guarantee to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Fannie Mae produced an automated underwriting system (AUS) tool called Desktop Underwriter (DU) which lenders can use to automatically determine if

6201-606: The United States or any agency or instrumentality of the United States other than Freddie Mac." The FHLMC and FHLMC securities are not funded or protected by the US Government. FHLMC securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in public communications issued by the FHLMC. There is a widespread belief that FHLMC securities are backed by some sort of implied federal guarantee and

6318-421: The ability to monitor and control mortgage originators. Competition between the GSEs and private securitizers for loans further undermined GSEs power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas

6435-415: The borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARM's), and in

6552-597: The buyers of their securities offer them high prices. This is partly due to an "implicit guarantee" that the government would not allow such important institutions to fail or default on debt. This perception has allowed Fannie Mae and Freddie Mac to save an estimated $ 2 billion per year in borrowing costs. This implicit guarantee was tested by the subprime mortgage crisis , which caused the U.S. government to bail out and put into conservatorship Fannie Mae and Freddie Mac in September, 2008. Every GSE prospectus contains

6669-499: The companies at greater risk in bad times, such as during the subprime mortgage crisis . FNMA is exempt from state and local taxes, except for certain taxes on real estate. In addition, FNMA and FHLMC are exempt from SEC filing requirements; they file SEC 10-K and 10-Q reports, but many other reports, such as certain reports regarding their REMIC mortgage securities, are not filed. Lastly, money market funds have diversification requirements, so that not more than 5% of assets may be from

6786-450: The company was lagging behind and should "do more". Freddie Mac was put under a conservatorship of the U.S. federal government on Sunday, September 7, 2008. Freddie Mac's primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security (MBS) bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming

6903-580: The company's senior management". However, this regulation too met with opposition from both Democrats and Republicans. Several executives of Fannie Mae or Freddie Mac include Kenneth Duberstein , former Chief of Staff to President Reagan, advisor to John McCain 's Presidential Campaign in 2000 , and President George W. Bush's transition team leader (Fannie Mae board member 1998–2007); Franklin Raines , former Budget Director for President Clinton, CEO from 1999 to 2004—statements about his role as an advisor to

7020-573: The company. The announcement followed reports two days earlier that the Federal government was planning to take over Fannie Mae and Freddie Mac and had met with their CEOs on short notice. The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008, law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased

7137-430: The company. The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008, law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling by US$ 800 billion (equivalent to $ 1,111,800,000,000 in 2023), to

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7254-677: The corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s." In 2000, because of a re-assessment of the housing market by HUD , anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals. The intent

7371-684: The cost of credit to the targeted borrowing sectors primarily by reducing the risk of capital losses to investors: agriculture , home finance and education . Well known GSEs are the Federal National Mortgage Association, known as Fannie Mae , and the Federal Home Loan Mortgage Corporation, or Freddie Mac . Congress created the first GSE in 1916 with the creation of the Farm Credit System . It initiated GSEs in

7488-545: The credit risk. That is, Freddie Mac guarantees that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays. Owing to Freddie Mac's financial guarantee, these MBS are particularly attractive to investors and, like other Agency MBS, are eligible to be traded in the "to-be-announced", or "TBA" market. The GSEs are allowed to buy only conforming loans , which limits secondary market demand for non-conforming loans. The relationship between supply and demand typically renders

7605-622: The debt markets by selling bonds, and provides liquidity to loan originators by purchasing whole loans. It purchases whole loans and then securitizes them for the investment market by creating MBS that are either retained or sold. As a Government Sponsored Enterprise, or GSE, Fannie Mae is compelled by law to provide liquidity to loan originators in all economic conditions. It must legally ignore adverse market conditions which appear to be unprofitable. If there are loans available for purchase that meet its predetermined underwriting standards, it must purchase them if no other buyers are available. Because of

7722-428: The early 1900s in the United States were short term mortgage loans with balloon payments . The Great Depression weakened the U.S. housing market, as people lost their jobs and were unable to make payments. By 1933, an estimated 20 to 25% of the nation's outstanding mortgage debt was in default. This resulted in foreclosures in which nearly 25% of America's homeowners lost their homes to banks. To address this, Fannie Mae

7839-423: The efficiency of capital markets and to overcome market imperfections which prevent funds from moving easily from suppliers of funds to areas of high loan demand. This is primarily done by some form of guarantee that limits the risk of capital losses to those supplying funds. Presently, GSEs primarily act as financial intermediaries to assist lenders and borrowers in housing and agriculture. Fannie Mae and Freddie Mac,

7956-474: The executive management to sign over the companies to the conservator by (a), and c) the gross violation of the ( fifth amendment ) taking clause. On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA. The action was "one of the most sweeping government interventions in private financial markets in decades". Lockhart also dismissed

8073-496: The firms' chief executive officers and boards of directors, and caused the issuance to the Treasury new senior preferred stock and common stock warrants amounting to 79.9% of each GSE. The value of the common stock and preferred stock to pre-conservatorship holders was greatly diminished by the suspension of future dividends on previously outstanding stock, in the effort to maintain the value of company debt and of mortgage-backed securities. FHFA stated that there are no plans to liquidate

8190-493: The first mortgage pass-through security of an approved lender in 1968 and in 1971 Freddie Mac issued its first mortgage pass-through, called a participation certificate , composed primarily of private mortgage loans. In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992 . The Act amended the charter of Fannie Mae and Freddie Mac to reflect the Democratic Congress' view that

8307-540: The floor", in a reference to the French Revolution . The major banks have since been sued by the Feds for a sum of $ 200,000,000, and some of the major banks have already settled. In addition, a lawsuit has been filed against the federal government by the shareholders of Fannie Mae and Freddie Mac, for a) creating an environment by which Fannie and Freddie would be unable to meet their financial obligations b) forcing

8424-436: The following text, or something virtually identical, in bold letters, and has since before the sub-prime loans were originated: "Neither the certificates nor interest on the certificates are guaranteed by the United States, and they do not constitute a debt or obligation of the United States or any of its agencies of instrumentalities other than Fannie Mae." Critics of the GSEs have challenged the "implicit guarantee" since before

8541-511: The full Senate for a vote. Sen. John McCain's decision to become a cosponsor of S.190 almost a year later in 2006 was the last action taken regarding Sen. Hagel's bill in spite of developments since clearing the Senate Committee. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.190. At

8658-468: The gap has run between plus to minus one month." In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report on September 20, 2004, alleging widespread accounting errors. Fannie Mae was expected to spend more than $ 1 billion (equivalent to $ 1,454,000,000 in 2023) in 2006 alone to complete its internal audit and bring it closer to compliance. The necessary restatement

8775-530: The head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors." Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk

8892-487: The home finance segment of the economy with the creation of the Federal Home Loan Banks in 1932; and it targeted education when it chartered Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become a fully private institution via legislation in 1995). The residential mortgage borrowing segment is by far the largest of the borrowing segments in which

9009-664: The homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families. Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates , interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund,

9126-557: The illegal fund raising benefited members of the House Financial Services Committee , a panel whose decisions can affect Freddie Mac. Notably, Freddie Mac held more than 40 fundraisers for House Financial Services Chairman Michael Oxley (R-OH). Both Fannie Mae and Freddie Mac often benefited from an implied guarantee of fitness equivalent to truly federally backed financial groups. As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of

9243-503: The implied guarantee, as well as various special treatments given to Fannie by the government, greatly enhanced its success. For example, the implied guarantee allowed Fannie Mae and Freddie Mac to save billions in borrowing costs, as their credit rating was very good. Estimates by the Congressional Budget Office and the Treasury Department put the figure at about $ 2 billion per year. Vernon L. Smith, recipient of

9360-581: The investments. At the outset of the case, the FHFA asked for about $ 1.1 billion. The order brought to conclusion a rare trial addressing alleged mortgage-related infractions committed during the housing boom. Over the past few years, more than a dozen firms chose to settle similar allegations brought by the FHFA rather than face a court battle. The settlements have brought Fannie and Freddie $ 18 billion in penalties. In her decision, Judge Cote wrote that Nomura, in offering documents for mortgage-backed securities sold to Fannie and Freddie, didn't accurately describe

9477-584: The largest corporate restatements in U.S. history. As a result, in November, it was fined $ 125 million—an amount called "peanuts" by Forbes magazine. On April 18, 2006, Freddie Mac was fined $ 3.8 million, by far the largest amount ever assessed by the Federal Election Commission, as a result of illegal campaign contributions. Freddie Mac was accused of illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected about $ 1.7 million for federal candidates. Much of

9594-518: The loans' quality. "The magnitude of falsity, conservatively measured, is enormous", she wrote. During the boom, Fannie and Freddie invested billions of dollars in mortgage-backed securities issued by such companies as Nomura. Those investments bolstered profits but, in the bust, contributed to steep losses that ultimately resulted in the companies' 2008 government takeover. Nomura and RBS were two of 18 financial institutions, including Bank of America Corp. and Goldman Sachs Group Inc. , targeted in 2011 by

9711-606: The national debt ceiling by US$ 800 billion, to a total of US$ 10.7 trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks. On September 7, 2008, the U.S. government took control of both Fannie Mae and Freddie Mac. Daniel Mudd (CEO of Fannie Mae) and Richard Syron (CEO of Freddie Mac) were replaced. Herbert M. Allison , former vice chairman of Merrill Lynch , took over Fannie Mae, and David M. Moffett , former vice chairman of US Bancorp, took over Freddie Mac. On May 8, 2013, Representative Scott Garrett introduced

9828-641: The newly private Fannie Mae and to further increase the availability of funds to finance mortgages and home ownership, Congress then established the Federal Home Loan Mortgage Corporation (Freddie Mac) as a private corporation through the Emergency Home Finance Act of 1970 . The charter of Freddie Mac was essentially the same as Fannie Mae's newly private charter: to expand the secondary market for mortgages and mortgage-backed securities by buying mortgages made by savings and loan associations and other depository institutions. Initially, Freddie Mac

9945-402: The non-conforming loan harder to sell (fewer competing buyers); thus it would cost the consumer more (typically 1/4 to 1/2 of a percentage point, and sometimes more, depending on credit market conditions). OFHEO , now merged into the new FHFA , annually sets the limit of the size of a conforming loan in response to the October to October change in mean home price. Above the conforming loan limit,

10062-414: The number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations (or "thrifts"). Its brother organization is the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac . In 2024, with over $ 4.3 trillion in assets, Fannie Mae is the largest company in the United States and the fifth largest company in the world, by assets. Fannie Mae

10179-575: The place of federal funds the government provides considerable unpriced benefits to the enterprises ... Government-sponsored enterprises are costly to the government and taxpayers ... the benefit is currently worth $ 6.5 billion annually." FNMA is a financial corporation which uses derivatives to "hedge" its cash flow. Derivative products it uses include interest rate swaps and options to enter interest rate swaps ("pay-fixed swaps", "receive-fixed swaps", " basis swaps ", " interest rate caps and swaptions ", " forward starting swaps "). Duration gap

10296-416: The place of federal funds the government provides considerable unpriced benefits to the enterprises. Government-sponsored enterprises are costly to the government and taxpayers. The benefit is currently worth $ 6.5 billion annually." As mortgage originators began to distribute more and more of their loans through private label mortgage-backed securities (MBSs), government-sponsored enterprises (GSEs) lost

10413-543: The preferred stock while private investors held the common stock; in 1968 it converted to a privately held corporation, to remove its activity and debt from the federal budget . In the 1968 change, arising from the Housing and Urban Development Act of 1968 , Fannie Mae's predecessor (also called Fannie Mae) was split into the current Fannie Mae and the Government National Mortgage Association ("Ginnie Mae"). Ginnie Mae, which remained

10530-415: The rate at which it can 'lend'. This was called "The big, fat gap" by Alan Greenspan. By August 2008, Fannie Mae's mortgage portfolio was in excess of $ 700 billion (equivalent to $ 972,800,000,000 in 2023). Fannie Mae also earns a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on mortgage loans underlying its single-family Fannie Mae MBS and on

10647-501: The resultant mortgage-backed security to investors in the secondary mortgage market , along with a guarantee that the stated principal and interest payments will be timely passed through to the investor.. In addition, Fannie MBS, like those of Freddie Mac MBS and Ginnie Mae MBS, are eligible to be traded in the "to-be-announced" or "TBA" market. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives

10764-470: The risks associated with individual loans. This also provides standardized instruments ( securitized securities) for investors. Some of the GSEs (such as Fannie Mae and Freddie Mac ) have been privately owned but publicly chartered; others, such as the Federal Home Loan Banks , are owned by the corporations that use their services. GSE securities carry no explicit government guarantee of creditworthiness, but lenders grant them favorable interest rates, and

10881-453: The same issuer. That is, a worst-case default would drop a fund not more than five percent. However, these rules do not apply to Fannie and Freddie. It would not be unusual to find a fund that had the vast majority of its assets in Fannie and Freddie debt. In 1996, the Congressional Budget Office wrote "there have been no federal appropriations for cash payments or guarantee subsidies. But in

10998-532: The same time, the House also introduced similar legislation, the Federal Housing Finance Reform Act of 2005 (H.R. 1461), in the spring of 2005. The House Financial Services Committee had crafted changes and produced a committee report by July 2005 for the legislation. It was passed by the House in October in spite of President George W. Bush's opposition to the House version, which stated: "The regulatory regime envisioned by H.R. 1461

11115-418: The single-family mortgage loans held in its retained portfolio. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk; that is, Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults. Fannie Mae's charter has historically prevented it from guaranteeing loans with

11232-404: The size, scale, and scope of the United States single-family residential and commercial residential markets, market participants viewed Fannie Mae corporate debt as having a very high probability of being repaid. Fannie Mae is able to borrow very inexpensively in the debt markets as a consequence of market perception. There usually exists a large difference between the rate at which it can borrow and

11349-421: The start of a sharp deterioration in mortgage underwriting standards. The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast,

11466-420: The start of a sharp deterioration in mortgage underwriting standards. The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast,

11583-552: The start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$ 1 billion in Freddie Mac senior preferred stock, paying at a rate of 10% per year, and the total investment may subsequently rise to as much as US$ 100 billion. Shares of Freddie Mac stock, however, plummeted to about one U.S. dollar on September 8, 2008, and dropped a further 50% on June 16, 2010, when

11700-471: The stocks delisted due to falling below minimum share prices for the NYSE. In 2008, the yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt. The housing market and economy eventually recovered, making Freddie Mac profitable once again. Freddie Mac is ranked No. 45 on the 2023 Fortune 500 list of the largest United States corporations by total revenue, and has $ 3.208 trillion in assets under management. From 1938 to 1968,

11817-446: The sub-prime crisis. Federal Home Loan Mortgage Corporation On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac ). The action has been described as "one of the most sweeping government interventions in private financial markets in decades". As of

11934-406: The sub-prime era, every Fannie Mae prospectus read in bold, all-caps letters: "The certificates and payments of principal and interest on the certificates are not guaranteed by the United States, and do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae." (Verbiage changed from all-caps to standard case for readability). However,

12051-503: The two companies. Fannie stock plunged. Some worried that Fannie lacked capital and might go bankrupt. Others worried about a government seizure. U.S. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae, in a last-ditch effort to prevent a total financial panic. Fannie and Freddie underpinned the whole U.S. mortgage market. As recently as 2008, Fannie Mae and

12168-529: The two most prominent GSEs, purchase mortgages and package them into mortgage-backed securities (MBS), which carry the financial backing of Fannie Mae or Freddie Mac. Because of this GSE financial backing, these MBS are particularly attractive to investors and are also eligible to trade in the "to-be-announced," or "TBA" market. In addition, the GSEs created a secondary market in loans through guarantees, bonding and securitization . This has allowed primary market debt issuers to increase loan volume and decrease

12285-438: The wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share. The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages—particularly with adjustable rate mortgages (ARM) —caused

12402-444: The wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share. The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages – particularly with adjustable rate mortgage loans (ARM) , caused

12519-574: Was 30% of the total number of dwelling units financed by mortgage purchases and increased to 55% by 2007. In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act (CRA) of 1977. In 1999, The New York Times reported that with

12636-441: Was clearly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Neither the certificates nor payments of principal and interest on the certificates were explicitly guaranteed by the United States government. The certificates did not legally constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae. During

12753-651: Was established by the U.S. Congress in 1938 by amendments to the National Housing Act as part of Franklin Delano Roosevelt 's New Deal . Originally chartered as the National Mortgage Association of Washington, the organization's explicit purpose was to provide local banks with federal money to finance home loans in an attempt to raise levels of home ownership and the availability of affordable housing. Fannie Mae created

12870-591: Was expected to cost $ 10.8 billion, but was completed at a total cost of $ 6.3 billion in restated earnings as listed in Fannie Mae's Annual Report on Form 10-K. Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On June 15, 2000, the House Banking Subcommittee On Capital Markets, Securities And Government-Sponsored Enterprises held hearings on Fannie Mae. Government-sponsored enterprise A government-sponsored enterprise ( GSE )

12987-416: Was first introduced by U.S. Senator Chuck Hagel . The Senate legislation was an effort to reform the existing GSE regulatory structure in light of the recent accounting problems and questionable management actions leading to considerable income restatements by the GSEs. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July 2005, the bill was never considered by

13104-473: Was formed, and subjected to oversight by the U.S. Department of Housing and Urban Development (HUD). Separately, The Federal Housing Finance Board (FHFB) was created as an independent agency to take the place of the FHLBB, to oversee the 12 Federal Home Loan Banks (also called district banks). In 1995, Freddie Mac began receiving affordable housing credit for buying subprime securities, and by 2004, HUD suggested

13221-589: Was much larger than was commonly believed. Nassim Taleb wrote in The Black Swan : "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'". On January 26, 2005, the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190)

13338-743: Was owned by the twelve Federal Home Loan Banks and governed by the Federal Home Loan Bank Board . In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") revised and standardized the regulation of Fannie Mae and Freddie Mac. It also severed Freddie Mac's ties to the Federal Home Loan Bank System. The Federal Home Loan Bank Board (FHLBB) was abolished and replaced by different and separate entities. An 18-member board of directors for Freddie Mac

13455-514: Was ranked number 27 on the Fortune 500 rankings of the largest United States corporations by total revenue and was ranked number 58 on the Fortune Global 500 rankings of the largest global corporations by total revenue. In terms of profit, Fannie Mae is the 15th most profitable company in the United States and the 33rd most profitable in the world. Historically, most housing loans in

13572-584: Was still called Fannie Mae and its charter continued to support the purchase of mortgages from savings and loan associations and other depository institutions, but without an explicit insurance policy that guaranteed the value of the mortgages. The publicly financed institution was named the Government National Mortgage Association (Ginnie Mae) and it explicitly guaranteed the repayments of securities backed by mortgages made to government employees or veterans (the mortgages themselves were also guaranteed by other government organizations). To provide competition for

13689-543: Was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. As Daniel Mudd , then president and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: We also set conservative underwriting standards for loans we finance to ensure

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