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The Federal National Mortgage Association, better known as Fannie Mae, is worth more than $100 billion, making it the third largest corporation in the United States in terms of assets. The one-time government agency has made a tremendous impact on the home finance industry since it was chartered by Congress in 1938. As a publicly owned company regulated by the federal government, Fannie Mae is an unusual instrument in the American economy.
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 of 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 under way, 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.
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 non-voting preferred stock, and non-voting 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 non-voting common shares to become voting ones. The Department of Housing and Urban Development (HUD) maintains "regulatory power" over the new Fannie Mae. Any stock, obligation, or other security must be approved by the Secretary of HUD. The secretary may also require that a reasonable number of Fannie Mae purchases are 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 of 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 of 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.
As a private corporation, Fannie Mae has 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 sky-rocketing 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: of 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 are attractive investments because they are more liquid than the usual packaged mortgage pools. Fannie Mae's MBS "Swap Program" allows lending institutions to trade loans directly for the more liquid securities. Fannie Mae guarantees 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% 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 can 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 has 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 has become more profitable than ever. The secondary mortgage market has changed dramatically since 1938. Fannie Mae has shown remarkable agility in adapting to those changes. As large corporations such as Sears and Citicorp become more active in the secondary mortgage market, Fannie Mae will have to continue to be innovative to remain competitive.
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