3900 Wisconsin Avenue, NW
At Fannie Mae, we are in the American Dream business. Our Mission is to tear down barriers, lower costs, and increase the opportunities for homeownership and affordable rental housing for all Americans. Because having a safe place to call home strengthens families, communities, and our nation as a whole.
Fannie Mae, also known as Federal National Mortgage Association, is the largest nonbank financial services company in the world. A shareholder-owned company, Fannie Mae is one of the largest corporations in America. It operates exclusively in the secondary mortgage markets, serving the single-family and multifamily housing markets. Fannie Mae also works to stimulate housing and community development across the nation. While holding $675 billion in assets, Fannie Mae also guarantees in excess of $700 billion in Mortgage-Backed Securities (MBS). The one-time government agency has made a tremendous impact on the home finance industry since it was chartered by Congress in 1938. Regulated by the federal government, Fannie Mae is an unusual instrument in the American economy.
Federal Support of National Housing Market: 1930s-40s
Fannie Mae was originally designed to help relieve the nation's housing problems during the Depression. Title III of the Federal Housing Act of 1934 provided for the incorporation of private national mortgage associations to create a national secondary mortgage market. But in February 1938, since no private associations had yet formed, the Federal Housing Administration chartered the National Mortgage Association of Washington to buy and sell mortgages. Its name was changed three months later to the Federal National Mortgage Association, or FNMA, and it has been known as Fannie Mae ever since.
The federal government took an interest in facilitating home mortgages as a way to invigorate the residential construction industry as well as to provide adequate housing for its citizens. The Depression had taken a heavy toll on private lending institutions. Fannie Mae's primary purpose was to establish a secondary mortgage market to rejuvenate original lenders such as mortgage banks, savings and loan associations, and commercial banks by stimulating enough cash flow to allow them to make new loans. Fannie Mae bought mortgages insured by the Federal Housing Administration (FHA) from these private lenders, and either kept them for its own portfolio or sold them to private investors.
The secondary market Fannie Mae created also made private lenders confident about making FHA-insured mortgages, which some had been reluctant to do. Once assured that they could easily turn these mortgages into cash if they needed to, lenders were more inclined to extend mortgage credit. In addition, the secondary mortgage market helped smooth out discrepancies between capital-rich and capital-poor regions of the country. Fannie Mae could buy mortgages from the South or West and sell them to investors in the capital-rich East. In this way a Boston banker could invest in Arizona mortgages while a local lender in Arizona was no longer limited in the number of loans he could make by the cash deposits of his customers. Under Sam Husbands, who presided over the association from 1938 to 1948, Fannie Mae bought 66,947 FHA-insured mortgages and sold 49,048.
In 1949, Fannie Mae expanded its activities to include buying and selling loans guaranteed by the Veterans Administration (VA). As veterans returned from the war and the great American baby boom got underway, Fannie Mae was busier than ever. The association bought 133,032 mortgages in 1950 compared with 6,734 in 1948. Some critics viewed Fannie Mae's growth with alarm, however, charging that the company had brought government too far into the private sector.
Transforming Fannie Mae: 1950s-60s
In 1954, Congress responded with the Federal National Mortgage Association Charter Act, which turned Fannie Mae into a mixed ownership corporation. The Treasury of the United States was issued nonvoting preferred stock, and nonvoting common stock was sold to mortgage lenders, who were now required to own stock in order to sell mortgages to Fannie Mae. Fannie Mae was made responsible for special assistance for certain mortgages when the president or Congress requested, and also for the management of mortgages acquired before 1954.
Throughout the 1950s and early 1960s Fannie Mae continued to buy and sell FHA and VA mortgages. But in 1966, primary mortgage lenders found themselves temporarily without the liquid resources to make new mortgages. Fannie Mae, until then a relatively minor player in the secondary market because it was restricted to government-insured (FHA and VA) mortgages, became the largest buyer in the market. The cost of borrowing enough money to purchase all the mortgages was high enough that Fannie Mae's profits dropped significantly that year. Lending eased at the end of 1966, relieving the pressure on Fannie Mae. But when mortgage funds became scarce again a year later, it became clear that major changes were necessary to ensure Fannie Mae's continued prosperity.
In 1968, Fannie Mae began the transition from mixed ownership to a private corporation. The Housing and Urban Development Act of 1968 split the old Fannie Mae into two separate corporations: the new Fannie Mae conducted secondary mortgage market activities just as the old one had done, while a new company called the Government National Mortgage Association (GNMA), or Ginnie Mae, assumed the "special assistance" and "management" functions of the old Fannie Mae, guaranteeing FHA and VA mortgages. The Treasury Department's preferred stock was retired and a schedule was set for nonvoting common shares to become voting ones. The Department of Housing and Urban Development (HUD) maintained "regulatory power" over the new Fannie Mae. Any stock, obligation, or other security had to be approved by the Secretary of HUD. The secretary could also require that a reasonable number of Fannie Mae purchases were in step with HUD's goal of assuring quality housing for moderate and low-income families.
On December 2, 1969, President Richard Nixon dismissed Raymond H. Lapin as chief of Fannie Mae. A Democrat, Lapin had been appointed president of the association by President Lyndon Johnson in July 1967 and had overseen Fannie Mae's transitional period. The ousted chief filed suit in federal court claiming that his removal was politically motivated and that Nixon had failed to show "good cause," but the courts twice refused to reinstate Lapin. In January 1970, Oakley Hunter took over as president; Fannie Mae's transition to private control was completed on May 21, 1970. The new board of directors had 15 members, ten elected by the stockholders and five appointed by the president.
Sailing into Choppy Economic Waters: 1970s-80s
As a private corporation, Fannie Mae had to adjust to the growing complexity of the secondary mortgage market. In 1972, the company bought its first conventional mortgages--mortgages not insured by the FHA or guaranteed by the VA--and in 1974, Fannie Mae began buying condominium and planned unit development mortgages. This flexibility kept the company profitable through the first half of the 1970s.
As interest rates began to rise in 1979, Fannie Mae faced the most critical period in its history. Because the company borrows the money it uses to purchase mortgages through debentures and short-term notes, it is especially vulnerable to rising interest rates. The skyrocketing rates of the early 1980s put Fannie Mae's new chairman, David O. Maxwell, to the test. Maxwell replaced Hunter in 1981, a time when Fannie Mae was losing millions of dollars by borrowing at high interest rates to carry mortgages at lower ones. Maxwell initiated several programs to transfer some of the interest-rate risk to someone else. One of these was to begin buying adjustable-rate mortgages (ARMs), especially since many primary lending institutions were shifting to ARMs. The interest rate on ARMs varies: if interest rates go up, the homeowner pays more per month; if they go down he or she pays less.
Fannie Mae also began selling mortgage-backed securities (MBS) in 1981 to help finance its mortgage purchases and to generate fee income. These securities were attractive investments because they were more liquid than the usual packaged mortgage pools. Fannie Mae's MBS "Swap Program" allowed lending institutions to trade loans directly for the more liquid securities. Fannie Mae guaranteed the timely payment of interest and principal on the securities. By 1988, Fannie Mae had issued more than $140 billion in mortgage-backed securities.
By 1985, Fannie Mae was profitable again. The company had survived the interest-rate nightmares of the early 1980s and had positioned itself against future interest-rate risk through ARMs and MBSs. That year, Fannie Mae began borrowing money from abroad to finance its purchases, since the 30 percent withholding tax on foreign investment had been abolished. Continuing to respond to changes in the home finance market, Fannie Mae began marketing real estate mortgage investment conduits (REMICs) in 1987. These securities could be specifically tailored to an investor's needs in terms of maturity dates, allowing Fannie Mae to attract investors not traditionally interested in mortgage-related investment products.
In 1988 Fannie Mae celebrated 50 years of service to the home finance industry with record earnings of $345 million in the first three quarters alone. Of the $400 billion Fannie Mae had pumped into the nation's mortgage industry in the past half century, $300 billion of it came after 1980. Under Chairman David Maxwell's aggressive leadership, Fannie Mae had become more profitable than ever. Tellingly, in 1988, Fannie Mae was added to the Standard and Poor's 500 stock index.
The secondary mortgage market had changed dramatically since 1938, but Fannie Mae had shown remarkable agility in adapting to those changes. As large corporations such as Sears and Citicorp became more active in the secondary mortgage market, Fannie Mae would have to continue its innovative ways in order to remain competitive.
Steady Growth: 1990s
Fannie Mae's total income in 1990 was $1.9 billion with 34 percent coming from fees and other service income and 66 percent from investment income. A portion of the company's money went toward the Fannie Mae Foundation (FMF), founded in 1979 for the purpose of making charitable contributions. In 1991 FMF earmarked more than 50 percent of its grants for programs supporting housing, community development, and social concerns. In 1992, FMF made its largest grant to date, $5.5 million to help establish the National Center for Lead-Safe Housing.
Fannie Mae launched the "Opening Doors to Affordable Housing" initiative in 1991. In a little under two years, the corporation produced $10 billion in purchases for low- and moderate-income and special needs housing. In 1994, Fannie Mae expanded the initiative by way of the "Trillion Dollar Commitment." Also that year Fannie Mae instituted its Partnership Office initiative, a program designed to bring together major players, including lenders, local governments and nonprofit groups, builders, and developers, to work toward expanding affordable rental and homeownership opportunities in their areas.
The mid-1990s was marked by a spike in Congressional interest in the activities and regulation of Fannie Mae and Freddie Mac, and in 1995 the Department of Housing and Urban Development (HUD) established new goals for Fannie Mae's low- and moderate-income housing financing. In 1996, Fannie Mae marked its tenth consecutive year of record earnings.
In 1998, Fannie Mae passed the halfway point toward fulfilling its Trillion Dollar Commitment. "Mortgage lending is big business, with big money and big numbers bandied about daily. Still, the entire industry paid attention in March 1994 when Fannie Mae announced its $1 trillion initiative, vowing to provide home mortgages to ten million families, focusing primarily on low-income and traditionally underserved borrowers," wrote Blaise Zerga for InfoWorld in May.
Technological improvements such as automated mortgage financing with new underwriting applications allowed Fannie Mae to make rapid progress toward its goal, according to the article. Fannie Mae provided software and training to loan officers of lending institutions: the result was a dramatically shortened mortgage application process.
James A. Johnson, who had guided Fannie Mae through the decade of growth, was succeeded as chairman and CEO by Franklin D. Raines in 1999. Fannie Mae--now officially operating under that name--also changed its mission statement that year, placing an emphasis on affordable rental housing as well as home ownership.
Facing a Fractious Future: 2000 and Beyond
Bankers and trade groups meanwhile had become more vocal regarding government-sponsored enterprises (GSEs) such as Fannie Mae, saying income tax breaks, exemption from Securities and Exchange Commission filing fees, and the perception of government backing, gave the GSEs a competitive advantage.
"With their leverage ratios and cost of capital, you're not on a level playing field with them," the chief executive officer of Wells Fargo Home Mortgage told American Banker in 2001. "They have a charter to help foster homeownership in America, but when they expand into other products and other issues, you have to ask, 'Why should they continue to leverage those government benefits, because they're really outside that mission.'"
The organization's traditional role in the industry had been to provide a source of liquidity for the fixed rate conforming mortgage market, but Fannie Mae had begun playing a larger role in the subprime lending, multifamily, and adjustable rate markets. Competitors feared erosion of business in those key areas.
According to a May 2001 Birmingham Business Journal article, Fannie Mae and Freddie Mac controlled about 43 percent of the U.S. mortgage market. That percentage was expected to exceed 90 percent by 2003.
The article also asserted that the realities of Wall Street pushed Fannie Mae to pursue growth. To do so the GSEs entered riskier areas such as subprime lending and home-equity lending, thereby drifting further from their mission.
Detractors also pointed with concern to the enterprise's level of reserves. Members of Congress pushed for higher reserve amounts and increased regulation of the GSEs as the new century began.
The increasing involvement of the GSEs in multi-unit housing also drew ire. HUD had pushed Fannie Mae to increase its efforts in creating affordable housing, and the company upped its activity in the multifamily area to meet its goals. Competitors balked at the move and contended the GSEs' automatic underwriting networks had become so integral to the multifamily lending industry, they had to work hand-in-hand with them or risk being pushed out of the market.
Washington, D.C.-based FM Watch, a coalition of organizations monitoring the activities of the GSEs, fought to keep them within the boundaries of their missions. In particular, FM Watch viewed the underwriting network as a threat to competition and a vehicle by which Fannie Mae could encroach on the primary mortgage market. Moreover, the group asserted that the GSEs actually did little to ease the need for low- and moderate-income housing given HUD's broad definition of what was considered affordable. GE Capital Services, Chase Manhattan Corporation, and Wells Fargo & Company were among the members of FM Watch.
Supporters of the GSEs said the agencies historically stayed in the mortgage market when others were driven out by tough times. During the early 1990s, while S&Ls were going belly up and banks were edgy, Fannie Mae stayed in the commercial housing market. In addition, they said because GSEs could borrow money more cheaply, this translated into lower rents for tenants. Finally, the GSEs had programs targeting rural areas and small properties, situations other large players in the mortgage industry were unlikely to touch.
Franklin Raines predicted continued growth for Fannie Mae based on ongoing desire for homeownership and increased willingness to borrow, according to a November 2001 American Banker article. He nixed the idea of going into new areas of business, such as credit card debt, to drive growth, a move that would surely be opposed by critics and would require Congressional approval.
As the year drew to a close Fannie Mae continued to thrive, despite economic recession and war in Afghanistan. "People will give up a lot of other things before they give up their homes," Raines told Money magazine in December. "That is what makes this such a good business to be in." Fannie Mae was on track to mark its 15th consecutive year of double-digit earnings growth, a feat expected to be matched by only two other S&P companies, Home Depot and Automatic Data Processing.
Still, the future was not certain; if Congress withdrew its charter, Fannie Mae would lose its competitive advantage. In addition, there was a limit to the percentage of the mortgage market Fannie Mae could swallow up, which limited growth in that area. Plus, concerns about the GSEs' influence on the marketplace were being expressed by powerful figures in government, including Federal Reserve Chairman Alan Greenspan.
Yet, Fannie Mae had many allies in Washington, as some of its former executives were among Democratic and Republican insiders. Fannie Mae also was no shrinking violet about touting its own cause. According to Money magazine, Fannie Mae and FMF had spent about $75 million in advertising since 2000 to position itself in the public consciousness as a purveyor of the American Dream of homeownership.
Principal Competitors: Freddie Mac; General Electric Capital Services.