FANNIE MAE

Fannie Mae is a private corporation chartered by the U.S. government for the purpose of assuring a liquidity of funds for private home mortgages. Fannie Mae was established by the National Housing Act of 1938, although not under its present name. Signed into law by President Franklin D. Roosevelt, this act established the Reconstruction Finance Corporation. Fannie Mae's predecessor, the National Mortgage Corporation, was a subsidiary of the Reconstruction Finance Corporation. In 1968 the National Mortgage Corporation changed its name to the Federal National Mortgage Corporation, and in 1982 changed its name again, this time to Fannie Mae. "Fannie Mae" originated as a Wall Street nickname for the corporation. Other legislation relating to Fannie Mae is the Housing Act of 1954 and Title VIII of the Housing and Urban Development Act of 1968. Oversight for Fannie Mae is provided by the U.S. Treasury and the U.S. Department of Housing and Urban Development (HUD).

Because of the Great Depression, the U.S. government in 1934 created the Federal Housing Administration (FHA). The purpose of the FHA was to provide a "stabilizing influence" on the U.S. housing and real estate market. The FHA insures mortgages on private homes and multifamily rental housing projects. FHA-backed mortgages played an integral role in the development and subsequent stabilization of a national mortgage market. Fannie Mae was created to buy these mortgages from banks and mortgage institutions, thus ensuring a liquidity of funds for more mortgages—and also creating a secondary mortgage market. Fannie Mae also purchases mortgages insured by the Veterans Administration.

In 1954 Fannie Mae was authorized to issue common and preferred stock. Nonvoting preferred stock went to the U.S. Treasury while lending institutions wishing to sell mortgages to Fannie Mae were soon required to own prescribed shares of nonvoting common stock. In 1968 a portion of Fannie Mae was split off and became the Government National Mortgage Corporation (GNMA), now known affectionately as "Ginnie Mae." The GNMA remained a government agency under HUD, while Fannie Mae continued evolving as a privately owned corporation.

Although Fannie Mae is chartered by the federal government, it is a profit-oriented public corporation that earns income primarily from its mortgage portfolio investments and its mortgage-backed securities. In 1993 Fannie Mae purchased $90 billion worth of mortgages, boosting the value of its mortgage loan portfolio to over $200 billion. Income is derived from the difference between the yield on mortgage loans and the investment costs. These purchases are funded by the issuance of debt in various capital markets.

Fannie Mae also packages mortgages of like characteristics and uses these pools or baskets of mortgages as collateral for its securities. These mortgage-backed securities guarantee payment of interest and principal to the purchasers of these securities. These pass through securities provide investors with a fractional, undivided interest in the mortgage basket that serves as the underlying asset for the securities. In 1993 Fannie Mae issued mortgage-backed securities worth $221 billion.

Fannie Mae is the largest corporation in America with $366 billion in assets, plus $674 billion in outstanding mortgage-backed securities. Fannie Mae is the country's largest issuer of debt after the U.S. Treasury. By 1997 more than 12 million homes were at least in part financed by Fannie Mae and in 1996 Fannie Mae purchased or guaranteed $218 billion worth of home mortgages from approximately 1,500 lending institutions. Fannie Mae hopes to make mortgages easier and cheaper for all Americans but especially for minority and immigrant families. In 1997 Fannie Mae chairman James Johnson told America's Community Banker that shifting demographics and expanding markets will make possible home ownership for more members of the aforementioned two groups. He said that during the 1990s, loans to African Americans tripled while loans to Hispanic Americans doubled. He also stated that he believes that technology, counseling, education and intervention, and improved credit procedures will aid in Fannie Mae's growth.

Others in the mortgage business, however, feel that Fannie Mae's close association with the federal government gives it an unfair advantage in the mortgage-backed securities market. Competitors complain that no investor believes the "not guaranteed by the United States" bold type warning that accompanies Fannie Mae's issuances. Fannie Mae's bottom line is also greatly helped by its $2.25 billion line of credit with the U.S. Treasury and its exemptions from state and local income taxes and U.S. Securities and Exchange Commission registration. It is estimated that these exemptions contribute $6 billion a year to Fannie Mae's balance sheet. But because Fannie Mae is popular with Congress and tax-paying homeowners and purchasers, its status vis-à-vis the federal government is unlikely to change in the near future.