What Is Fannie Mae, Freddie Mac?

July 13, 2008 by Pelikan
Filed under: Fannie Mae, Freddie Mac, U.S. Economy 

As Fannie Mae and Freddie Mac are in the news – and will be as the U.S. housing market continues to melt down – it might be good to get a refresher or primer on just what these financial institutions are and what they mean to the marketplace.

Fannie Mae is the popular nickname for the Federal National Mortgage Association, or FNMA. Created in 1938 by President Franklin Roosevelt to provide credit and stability to a then-weak housing market, FNMA was re-chartered in 1968 as a share-holder owned company. Fannie trades in the New York Stock Exchange under the ticker symbol FNM. As of July 13, 2008 its price was $10.10 down $60.60 from its 52-week high.

Fannie’s corporate website describes its mission as “Our job is to help those who house America.” It also says of itself:

The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.

At the core, Fannie’s ultimate purpose is to help along the liquidity – or amount of readily lendable cash – in the nation’s housing market. Its customers are not consumers, those who buy homes; its customers are the banks and other financial institutions in the secondary mortgage market. This secondary market is where home mortgages are bundled and sold before their maturity (oftentimes well before their maturity) as financial instruments with the underlying mortgages as collateral. Put simply, the secondary market is the buying and selling of home mortgages. What the seller or original holder of a mortgage gets from this is cash to go out and make another loan. This is a primary service of Fannie. FNMA is the leading ‘market-maker’ of this secondary market.

FNMA makes its money by charging fees based in this market. For example, Bank A has let’s say 100 mortgages. Fannie purchases that group of mortgages, bundles them into one financial instrument, a bond, and sells the bond to investors. Fannie guarantees the investors which buy these bonds – mortgage backed securities (MBS) – that that the principal and interest in the underlying loans will be repaid – whether the original borrower keeps up on the house payments or not. For the investors in MBS’s then, Fannie assumes the credit risk. The investors pay the fees.

With the proliferation of junk housing loans over the past several years, Fannie is holding onto more and more risk as the numbers of these loans rise in their overall pool.

FNMA’s origins are of the federal government, but the company is not backed by the federal government. Half of all home mortgages are owned or guaranteed by Fannie or its offshoot, Freddie Mac, the Federal Home Loan Mortgage Corporation. At the time Fannie was given a private charter by the federal government in 1968, it had a monopoly in making the secondary mortgage market. Freddie was chartered as a private corporation by the feds in 1970 to provide competition. It is also not backed by the federal government.

Freddie also trades on the NYSE under the ticker symbol, FRE. You can find Freddie’s corporate website here.

Note: This being a blog - and me not being a financial expert – I’d like to ask that if you are one, and see an opportunity to improve this post, please comment.

Share/Save/Bookmark

Tags: ,

Comments

2 Comments on What Is Fannie Mae, Freddie Mac?

  1. What Is Fannie Mae, Freddie Mac? on Sun, 13th Jul 2008 10:48 pm

    2. [...] Read the rest of this great post here [...]

  2. News Coverage: Fannie Mae and Freddie Mac : Clips & Comment on Sat, 6th Sep 2008 5:05 pm

    3. [...] an explanation of what are Fannie Mae and Freddie Mac see this post. Google Finance FNMA, FRE Comparison Chart [...]

Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!