By investing in the mortgage market, Fannie Mae creates more liquidity for lenders such as banks, thrifts , and credit unions, which in turn allows them to underwrite or fund more mortgages. The mortgages it purchases and guarantees must meet strict criteria. These areas include Hawaii, Alaska, Guam, and the U. In order to do business with Fannie Mae, a mortgage lender must comply with the Statement on Subprime Lending issued by the federal government.
The statement addresses several risks associated with subprime loans , such as low introductory rates followed by higher variable rates; very high limits on how much an interest rate may increase; limited to no income documentation; and product features that make frequent refinancing of the loan likely.
This helped people across the country buy, refinance, and rent about three million homes. After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities MBS.
MBS are asset-backed securities secured by a mortgage or pool of mortgages. It guarantees payments of principal and interest on its MBS. Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio.
This invests in its own mortgage-backed securities as well as those from other institutions. Fannie Mae issues debt called agency debt to fund its retained portfolio. Fannie Mae has been publicly traded since It was delisted following the mortgage, housing, and financial crisis after its stock plummeted below the minimum capital requirements mandated by the New York Stock Exchange.
It now trades over-the-counter. Unethical lending practices led to the crisis. During the housing boom of the mids, lenders lowered their standards and offered home loans to borrowers with poor credit. In , the housing bubble burst, and hundreds of thousands of these borrowers went into default, which led to what was known as the subprime meltdown.
This had a ripple effect on the credit markets, which sent the financial markets into a tailspin and created the most severe recession in decades in the United States. In the latter half of , Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Committee.
The U. In essence, the U. Fannie Mae now offers a number of different business initiatives and credit options to homeowners, working with lenders to help people who may otherwise have difficulties obtaining financing. A full list of products and their descriptions are available on Fannie Mae's website.
Following the mortgage meltdown, Fannie Mae began to focus on loan modifications. Federal Housing Finance Agency. Federal Reserve Bank of St. Louis Review. Library of Congress. Securities and Exchange Commission. Federal Reserve. Government Publishing Office. The White House. New York State Department of Labor. Freddie Mac. Real Estate Investing. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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Table of Contents Expand. What Is Fannie Mae? What Is Freddie Mac? What Fannie and Freddie Do. Who Regulates Fannie and Freddie? An Implicit Guarantee.
Role in the Financial Crisis. The Bottom Line. Key Takeaways Fannie Mae was first chartered by the U. Neither organization originates or services loans but buys mortgages from lenders to hold or repackage as mortgage-backed securities that can be sold.
Lenders use the money from selling mortgages to Fannie Mae and Freddie Mac to originate more loans, which helps individuals, families, and investors access a stable supply of mortgage money. The Biden administration extended the deadline for the moratorium on foreclosures and evictions during the pandemic. Article Sources. Investopedia requires writers to use primary sources to support their work. However, all parties involved, including the FHFA, have retained advisers to help them get back on track for non-governmental ownership.
But they were also public companies, whose bonds and shares were widely held by investors. Given their importance, most investors in Fannie and Freddie assumed that they were too big to fail. If the companies ever ran into trouble, they assumed the government would bail Freddie and Fannie out.
This especially gave Freddie and Fannie favorable treatment in the bond market. The implicit guarantee made their bonds less risky bets than bonds from other financial companies, helping them borrow money more cheaply. Fannie and Freddie borrowed trillions of dollars, meaning that their bonds were very widely held—further ensuring they became too big to fail.
Fannie Mae and Freddie Mac pumped more and more money into the U. This helped support the bubble in home prices that emerged in through Together with lax oversight and financial engineering at big investment banks, unsustainable mortgages took off, with many people getting mortgage loans who might not have qualified for home loan financing in more normal times. Both homebuyers and the financial system as a whole became overleveraged and unbalanced, driven by financing from Freddie Mac and Fannie Mae.
The unwinding of the housing bubble in and the financial crisis that followed in hit Fannie and Freddie hard. To avoid a complete collapse, the FHFA seized the companies and put them into conservatorship on September 6, —just days before Lehman Brothers filed for bankruptcy and sent the financial markets into a tailspin.
Investors who still hold the shares are anxious for the companies to leave conservatorship, which would let them trade on a stock exchange again and rise in value. The plan has three big goals:. The idea is to create a system that keeps mortgages affordable and accessible, but without the implicit guarantee that contributed to the financial crisis of The FHFA has developed a scorecard that is released each year to measure progress towards these goals. However, Congress must also decide that Fannie and Freddie can be moved out of conservatorship.
For decades, Fannie Mae and Freddie Mac have been tasked with ensuring that the mortgage market in the U. They accomplish this by buying mortgages and freeing up the balance sheets of other financial institutions. By packaging residential mortgages into securities, these entities are deeply involved with private capital markets. How Fannie Mae Works for Homebuyers. Notable Happenings. By Terri Williams. Learn about our editorial policies.
Reviewed by Eric Estevez. Learn about our Financial Review Board. Key Takeaways Fannie Mae makes homeownership more affordable. It expands the number of people who qualify for mortgages. Fannie Mae makes mortgage lending less risky. It was instrumental in sustaining the housing market during the Great Recession.
Fannie Mae was bailed out during the housing crisis, but has repaid those funds to the Treasury. Article Sources. Your Privacy Rights. To change or withdraw your consent choices for TheBalance. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes.
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