The Federal National Mortgage Association or Fannie Mae is a federally supported corporation with a long history. Starting as a private business in 1968, it later became publicly listed in 1971 and is classified as a United States government-sponsored enterprise. The main driving force of the corporation is to encourage lending and bolster the local lending industry by assisting lenders to reinvest the money they would otherwise have to put into securities back into lending. In consequence, this will make mortgage lenders rely less on local savings and loan associations and grow their overall business in the process.
The Fannie Mae is tied to the Federal Home Loan Mortgage Corporation (Freddie Mac.) The entity was founded in 1938 during the Great Depression as part of the New Deal.
HISTORY OF FANNIE MAE
In the early 1900s, the majority of mortgage loans in the United States were short-term balloon payment loans. What this meant was that the mortgage did not fully amortize over the term of the note and as a result, left a balance due at maturity. During the Great Depression, individuals who were unable to work or pay for their mortgages fell victim to a sub-par housing market, which led to a whopping 25% of the total mortgage debt in the country falling in default by 1933. This rendered over a quarter of the total population of homeowners in America to have their homes thereinafter foreclosed, losing their houses to the banks.
In response, Fannie Mae was created by the U.S. Congress in 1938 during the Roosevelt administration as part of the New Deal, as an effort to combat the Great Depression. The National Mortgage Association of Washington (NMA) was set up to support local banks and to aid in lending to help increase levels of house ownership and to offer affordable housing. The Federal National Mortgage Association (Fannie Mae) was instrumental in making the secondary mortgage market liquid and in boosting the number of mortgages, especially FHA-insured mortgages, available for consumers to purchase. After its launch, Fannie Mae had a monopoly on the secondary mortgage market for the first thirty years. The government had a strong interest in bringing the jobless construction trade workers back to work, and they may have encouraged New Deal initiatives in order to do this.
Fannie Mae was obtained by the Federal Housing and Finance Agency (FHFA) in 1950 from the Federal Loan Agency (FHA). The Federal National Mortgage Association Charter Act of 1954 converted Fannie Mae from a ‘mixed-ownership corporation’ to private ownership; the federal government had the preferred stock, while private investors held the common stock. The 1968 move was to take the corporation off the federal budget, thus allowing it to engage in riskier and higher-return activities.
UNDERSTANDING HOW FANNIE MAE WORKS
It must be known that Fannie Mae is not the only agency that was important for the boosting of mortgages. Fannie Mae’s predecessor was once a single entity, but a 1968 law caused it to be divided in two: the present Fannie Mae and the Government National Mortgage Association (‘Ginnie Mae’). Ginnie Mae, a government entity, is a guarantor for loans guaranteed by the Federal Housing Administration (FHA), the Veterans Administration (VA), and the Farmer’s Home Administration (FmHA). In other words, the Ginnie Mae is the sole agency supported by the U.S. government’s full confidence and credit.
Fannie Mae previously only purchased conventional loans, which were those that were not insured by the FHA, VA, or FmHA. However, the entity was given a new charter in 1970 by the federal government, giving it the ability to purchase conventional loans. In order to compete with Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC), more commonly known as Freddie Mac, was also chartered in 1970. This provided for a more robust and efficient secondary mortgage market. FNMA became public on both the New York and Pacific Exchanges in the same year.
The name mortgage-backed securities (MBS) was originally used in 1981 when Fannie Mae issued its first mortgage passthrough. In 1971, Freddie Mac issued its first mortgage pass-through, known as a participation certificate, which was made up mostly of private loans and was guaranteed by Ginnie Mae.
WHERE DOES FANNIE MAE RECEIVE ITS REVENUE
The concept of mortgage-backed securities (MBS) was originally used in 1981 when Fannie Mae issued its first mortgage passthrough. In 1971, Freddie Mac issued its first mortgage pass-through, known as a participation certificate, which was made up mostly of private loans and was preceded by the first mortgage passthrough security of an approved loan guaranteed by Ginnie Mae.
Fannie Mae also generates a significant part of its revenue from guarantee fees on mortgage loans underpinning its single-family Fannie Mae mortgage-backed securities and on single-family mortgage loans maintained in its retained portfolio. Investors, or buyers of Fannie Mae mortgage-backed securities, are prepared to allow Fannie Mae to retain this charge in return for Fannie Mae taking credit risk, or guaranteeing that the scheduled principal and interest on the underlying loan would be paid even if the borrower fails.
Historically, Fannie Mae’s charter prohibited it from guaranteeing loans with loan-to-value ratios more than 80% without mortgage insurance or a repurchase agreement with the lender. This rule is not hard and fast, however, since, in 2006 and 2007, Fannie Mae purchased subprime and Alt-A loans as investments.
THE UNDERLYING MECHANISM DRIVING FANNIE MAE
Fannie Mae is a buyer of mortgage loans and the underlying mortgages, which it bundles into mortgage-backed securities. What this means is that Fannie Mae acquires mortgage loans from authorized mortgage sellers and securitizes them. In turn, the entity then offers the resulting mortgage-backed security to investors in the secondary mortgage market, accompanied by a guarantee that the stated principle and interest payments would be made on time. Additionally, Fannie MBS, like Freddie Mac and Ginnie Mae MBS, may be traded in the ‘to-be-announced or ‘TBA’ market. By buying mortgages, Fannie Mae and Freddie Mac offer more capital for banks and other financial institutions to issue new loans. This provides the housing and credit markets in the United States with flexibility and liquidity.
To ensure that Fannie Mae can guarantee the mortgage-backed securities it produces, it establishes criteria for the loans it will buy, referred to as ‘conforming’ loans. Fannie Mae developed an automated underwriting system (AUS) tool called Desktop Underwriter (DU) that lenders can use to determine automatically whether a loan is conforming; in 2004, Fannie Mae released Custom DU, which enables lenders to create custom underwriting rules to handle nonconforming loans as well. Jumbo loans, which are loans bigger than the limit that Fannie Mae and Freddie Mac would buy, are included in the secondary market for non-conforming loans.
RESTRICTIONS AND REGULATIONS FOR FANNIE MAE LOANS
Fannie Mae and Freddie Mac have a maximum loan amount for which they will guarantee. This is referred to as the ‘conforming loan limit.’ The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both GSEs, sets the conforming loan ceiling for Fannie Mae and Freddie Mac. OFHEO yearly establishes the maximum amount of a conforming loan based on October-to-October fluctuations in the national median house price, beyond which a mortgage is classified as a non-conforming jumbo loan. Alaska and Hawaii have a 50% greater conforming loan limit.
The GSEs will only purchase conforming loans for repackaging into the secondary market, thus reducing demand for non-conforming loans. As a result of the law of supply and demand, lenders find it more difficult to sell these loans in the secondary market, and therefore these loans usually cost borrowers more (about 1/4 to 1/2 of a percent).
FANNIE MAE’S GOVERNMENT SUPPORT
Originally, Fannie had an ‘explicit guarantee’ from the government; if it got in trouble, the government pledged to save it. This began to alter around 1968. Ginnie Mae and Fannie were divorced. Ginnie kept the express assurance. Fannie, on the other hand, became a private company established by Congress and endowed with a direct line of credit from the United States Treasury. Its status as a Government Sponsored Enterprise (GSE) effectively guaranteed its financing. Additionally, their charter restricted its operations to the mortgage sector. In this respect, they could not function normally as a private business, notwithstanding their status as a private corporation.
Fannie Mae received no direct government financing or support, and the securities issued by Fannie Mae had no express government guarantee of repayment. This was made very apparent in the legislation authorizing GSEs, on the securities themselves, and in many public statements released by Fannie Mae. [reference required] Neither the certificates themselves nor their principal and interest payments were expressly guaranteed by the US government. Except for Fannie Mae, the certificates did not represent a liability or obligation of the United States or any of its agencies or instrumentalities. Throughout the subprime crisis, each Fannie Mae prospectus stated 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.’
However, the implied guarantee, as well as other favorable government treatment, helped Fannie’s success considerably. For instance, the implicit guarantee enabled Fannie Mae and Freddie Mac to save billions of dollars in borrowing costs due to their excellent credit ratings. The Congressional Budget Office and the Treasury Department estimate the cost at about $2 billion each year.
Fannie Mae and Freddie Mac were permitted to maintain less capital than other financial institutions: for example, they were permitted to offer mortgage-backed securities with just half the capital needed of other financial organizations. The FDIC Bank Holding Company Act contains regulations governing the solvency of financial institutions. The rules mandate that conventional financial institutions maintain a capital-to-assets ratio of at least 3%. The GSEs, Fannie Mae, and Freddie Mac, are free from this rule and may, and often do, maintain a capital-to-assets ratio of less than 3%. Increased leverage enables higher profits in good times but exposes businesses to greater risk in bad times, such as the subprime mortgage crisis.
EXEMPTIONS OCCURRING TO FANNIE MAE
FNMA is tax-free on a state and municipal level, with the exception of some real estate taxes. Additionally, FNMA and FHLMC are exempt from SEC filing requirements; they submit 10-K and 10-Q reports with the SEC but do not file many other filings, including some disclosures relating to their REMIC mortgage securities.
Finally, money market funds are required to diversify their holdings, with no more than 5% of assets coming from a single issuer. That is, a worst-case default would result in a fund losing no more than 5% of its value. These regulations, however, do not apply to Fannie and Freddie. It would not be uncommon to discover a fund that invested the lion’s share of its assets in Fannie and Freddie’s debt.
The Congressional Budget Office said in 1996 that ‘no government funds have been appropriated for cash payments or guarantee subsidies.’ However, in lieu of federal money, the government offers significant unpriced advantages to businesses. Government-sponsored businesses are expensive for the government and taxpayers.
FNMA is a financial institution that uses derivatives to ‘hedging’ its cash flow. Interest rate swaps and options to enter interest rate swaps are among the derivative instruments it utilizes (‘pay-fixed swaps’, ‘receive-fixed swaps’, ‘basis swaps’, ‘interest rate caps and swaptions’, ‘forward starting swaps’). The duration gap is a financial and accounting phrase that refers to the difference between the duration of assets and obligations. It is often used by banks, pension funds, and other financial organizations to quantify their interest rate risk.
SERVING PAPERS ON FANNIE MAE
Fannie Mae comes under District of Columbia Process Service guidelines and is specifically classified under the SIC Code 6111 for Federal And Federally Sponsored Credit Agencies. SIC Code 6111 – Federal and Federally-Sponsored Credit Agencies is a final level code of the ‘Finance, Insurance, Real Estate Division. There are currently twenty-eight companies classified in this industry in the USA
Fannie Mae retains its business address for accepting District of Columbia Process Service in Midtown, which also functions as its mailing address for District of Columbia Process Service. The entity also has a phone number in order to ensure District of Columbia Process Service is done easier.
If it is a personal matter involving an employee of Fannie Mae, they must be personally served according to the District of Columbia Process Service. Serving a subject personally at this location can be extremely difficult if the subject to be served is unwilling to receive District of Columbia Process Service. Security may stop servers from entering and must know the reason for District of Columbia Process Service.
It must be known that according to requirements of the District of Columbia Process Service, Fannie Mae retains the authority to supervise and control any litigation involving a Fannie Mae mortgage loan. This renders a responsibility upon the servicer handling the District of Columbia Process Service to cooperate fully with Fannie Mae in prosecuting, defending, or resolving the matter. Fannie Mae must be referred to in judicial proceedings as ‘Federal National Mortgage Association (‘Fannie Mae’), a company established and operating under the laws of the United States of America.’ Fannie Mae is specifically not a government entity and should not be treated as such in furtherance of the District of Columbia Process Service.
Without prior written permission from Fannie Mae, the servicer is not allowed to start or intervene in District of Columbia Process Service or legal proceedings on Fannie Mae’s behalf, with the exception of regular foreclosures, bankruptcy cases, and possessory actions for certain mortgage loans. Additionally, in order to comply with District of Columbia Process Service guidelines, the servicer should take all reasonable steps to avoid the attachment of additional liens against the property that would be superior to Fannie Mae’s mortgage claim.
Recently, the Federal Housing Finance Agency raised the number of days investors are barred from bidding on foreclosure properties to allow others a chance to purchase houses first. With this change, owner-occupants, charities, and public organizations have thirty days to bid solely on Fannie Mae and Freddie Mac-owned real estate, compared with twenty days before.
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1. Often considered being ‘thrifts’
2. According to the Fortune 500, in 2018, Fannie Mae was rated 21st in total revenue among the biggest United States companies since being founded in 1938 during the Great Depression as part of the New Deal.
3. Which is often known as FHLMC
4. Fabozzi, Frank J.; Modigliani, Franco (1992), Mortgage and Mortgage-backed Securities Markets, Harvard Business School Press, p. 2, ISBN 0-87584-322-0
5. Adjustable-rate mortgages are sometimes confused with balloon payment mortgages. The distinction is that a balloon payment may require refinancing or repayment at the end of the period; some adjustable rate mortgages do not need to be refinanced, and the interest rate is automatically adjusted at the end of the applicable period. Some countries do not allow balloon payment mortgages for residential housing: the lender then must continue the loan (the reset option is required). For the borrower, therefore, there is no risk that the lender will refuse to refinance or continue the loan.
6. The final payment is called a balloon payment because of its large size.
7. Alford, Rob. ‘What Are the Origins of Freddie Mac and Fannie Mae?’ History News Network, hnn.us/articles/1849.html.
8. ‘12 U.S. Code Chapter 13, Subchapter III – NATIONAL MORTGAGE ASSOCIATIONS | LII / Legal Information Institute’.
9. “Desktop Underwriter & Desktop Originator.” Desktop Underwriter & Desktop Originator | Fannie Mae, singlefamily.fanniemae.com/applications-technology/desktop-underwriter-desktop-originator.
10. In early 2008, the decision was taken to enable mortgage-backed securities eligible for TBA (To-be-announced) to include up to 10% ‘jumbo’ loans.
11. “Get Started Here:” Conforming Loan Limits | Federal Housing Finance Agency, www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx.
12. Indeed, in 2008, with virtually no market for non-GSE-guaranteed bonds, non-conforming loans were priced roughly 1% to 1% higher than conforming loans.
13. Duhigg, Charles. ‘Loan-Agency Woes Swell from a Trickle to a Torrent.’ The New York Times, The New York Times, 11 July 2008, www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink.
14. According to Vernon L. Smith, winner of the Sveriges Riksbank Prize in Economic Sciences, FHLMC and FNMA are ‘implicitly taxpayer-backed organizations.’ The Economist has referred to FHLMC and FNMA’s ‘hidden government guarantee’. Alan Greenspan said in testimony before the House and Senate Banking Committees in 2004 that Fannie Mae’s (poor) financial condition was a consequence of markets thinking that the US Government would never allow Fannie Mae (or Freddie Mac) to collapse.
15. Section 2(a) of the Act of May 9, 1956 (Pub. L. No. 511; 70 Stat. 133
16. Investment Company Institute v. Camp, 401 U.S. 617 (1971
17. A real estate mortgage investment conduit (REMIC) is “an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors” under U.S. Federal income tax law and is “treated like a partnership for Federal income tax purposes with its income passed through to its interest holders
18. Duarte, Jefferson, and Douglas A. McManus. ‘Residential Mortgage Credit Derivatives.’ Real Estate Economics, vol. 39, no. 4, 2011, pp. 671–700., doi:10.1111/j.1540-6229.2011.00309.x.
19. The Standard Industrial Classification is a system for classifying industries by a four-digit code. Established in the United States in 1937, it is used by government agencies to classify industry areas.
20. MIDTOWN CENTER
1100 15TH ST, NW
WASHINGTON DC 20005
21. MIDTOWN CENTER
1100 15TH ST, NW
22. Sinnock, Bonnie. “Fannie Mae, Freddie Mac Give Consumers an Edge in Foreclosure Sales.” National Mortgage News, National Mortgage News, 2 Sept. 2021, www.nationalmortgagenews.com/news/fannie-mae-freddie-mac-give-consumers-an-edge-in-foreclosure-sales.