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Fannie Mae

From Alfawiki
Fannie Mae
Company typeGovernment-sponsored enterprise and public company
Template:OTCQB
IndustryFinancial services
Founded1938; 88 years ago (1938)
HeadquartersWashington, D.C., U.S.
Key people
ProductsMortgage-backed securities
RevenueDecrease Template:US$ (2023)
Increase Template:US$ (2023)
Total assetsIncrease Template:US$ (2023)
Total equityIncrease Template:US$ (2023)
Number of employees
c. 8,100 (December 2023)
Websitefanniemae.com

The Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae, operates as a United States government-sponsored enterprise and has been publicly traded since 1968. Established in 1938 amid the Great Depression under the New Deal initiatives, its primary objective is to foster growth in the secondary mortgage market by converting mortgage loans into mortgage-backed securitys (MBS). This securitization allows lenders to replenish their funds for issuing new loans, thereby enhancing liquidity within the market and diminishing dependence on local savings institutions. Its counterpart organization is the Federal Home Loan Mortgage Corporation (Freddie Mac).

By 2024, Fannie Mae’s assets exceed $4.3 trillion, positioning it as the largest company in the United States by asset size and fifth worldwide. It ranks 27th on the Fortune 500 by revenue and holds the 58th position on the Fortune Global 500. In terms of profitability, it is ranked 15th domestically and 33rd internationally, reflecting its substantial presence and leadership role within the financial services sector.

Origins and formative years

At the start of the 20th century, most housing loans in the U.S. were short-term with balloon payments due at maturity. The housing market suffered greatly during the Great Depression, with mortgage defaults reaching between 20% and 25% by 1933, resulting in widespread foreclosures. To stabilize housing finance and promote homeownership, Congress created Fannie Mae in 1938 through the National Housing Act as a component of President Franklin D. Roosevelt’s New Deal programs. Initially named the National Mortgage Association of Washington, its purpose was to supply local banks with federal capital to fund home loans by purchasing primarily FHA-insured mortgages, thus establishing a liquid secondary mortgage market where it held exclusive control for thirty years.

In 1950, Fannie Mae was incorporated into the Housing and Home Finance Agency. The Federal National Mortgage Association Charter Act of 1954 restructured it into a mixed-ownership corporation with preferred stock owned by the federal government and common stock held by private investors. To remove its debt and operations from federal accounts, Fannie Mae was converted into a private corporation under the Housing and Urban Development Act of 1968. This reorganization divided the original entity into two: Fannie Mae and the government-backed Government National Mortgage Association (Ginnie Mae).

Ginnie Mae provides guarantees for loans insured by FHA, VA, and Farmers Home Administration programs, backed uniquely by the full faith and credit of the U.S. government. In 1970, legislation permitted Fannie Mae to acquire conventional loans not insured by government agencies, while concurrently establishing Freddie Mac to compete within the secondary mortgage market sector. That same year marked Fannie Mae’s initial public offering on both New York and Pacific stock exchanges.

The introduction of its first mortgage pass-through security occurred in 1981, broadening its portfolio within mortgage-backed securities offerings. Ginnie Mae had initiated this market segment in 1968, followed by Freddie Mac’s entry with participation certificates in 1971. These financial developments significantly improved liquidity and operational efficiency across the mortgage industry, reinforcing Fannie Mae’s dominant market position and supporting its ongoing expansion.

1990s

In 1992, President George H. W. Bush enacted the Housing and Community Development Act of 1992, which revised Fannie Mae's charter to obligate the government-sponsored enterprises (GSEs) to support financing for affordable housing targeting low- and moderate-income households, while ensuring sound financial performance and reasonable returns. The legislation required HUD to establish annual "affordable housing goals," subject to Congressional approval, beginning at 30% of mortgage acquisitions and increasing to 55% by 2007.

By 1999, responding to directives from the Clinton administration, Fannie Mae broadened its mortgage lending activities to include more low- and moderate-income borrowers, raising portfolio allocations in economically distressed urban neighborhoods as identified under the Community Reinvestment Act (CRA) of 1977. That same year, The New York Times highlighted that Fannie Mae’s strategic pivot toward the subprime sector heightened its risk profile, potentially undermining its financial resilience during economic downturns and possibly necessitating government assistance akin to the savings and loan crisis of the 1980s.

2000s

In 2000, HUD introduced anti-predatory lending regulations that excluded high-cost, risky loans from counting toward affordable housing targets; however, these protections were rescinded in 2004, permitting high-risk loans to qualify once again.

Fannie Mae sought to uphold underwriting criteria for conventional conforming mortgages to promote stable lending among non-prime borrowers. Nevertheless, as then-CEO Daniel Mudd testified in 2007, stringent standards pushed business toward private lenders who offered riskier products such as teaser-rate and interest-only loans. Mudd admitted that aggressive competitor offerings caused Fannie Mae to lose a substantial portion of its market share.

In 2003, The New York Times journalist Alex Berenson exposed that Fannie Mae’s risk exposure was greater than commonly acknowledged. Meanwhile, Nassim Nicholas Taleb characterized the company as susceptible to unforeseen risks despite internal reassurances.

Legislative attempts aimed at reforming GSE oversight surfaced with the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190), introduced by Senator Chuck Hagel. Although it passed the Senate Banking Committee, it never advanced to a full Senate vote. Senator John McCain later joined as a cosponsor in 2006, emphasizing concerns about Fannie Mae’s governance and profit disclosures.

At the same time, the House passed the Federal Housing Finance Reform Act of 2005 (H.R. 1461), despite opposition from President George W. Bush, who objected to its comparatively lenient regulatory standards relative to other financial institutions. The bill encountered bipartisan opposition and did not receive Senate consideration.

The mortgage crisis from late 2007

To fulfill federal Housing and Urban Development (HUD) objectives, GSEs such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks prioritized expanding homeownership opportunities for low- and middle-income families by offering affordable mortgage products like 30-year fixed-rate loans with minimal down payments. However, between 2003 and 2004, the subprime mortgage crisis unfolded, shifting market dynamics away from regulated GSEs toward Mortgage-Backed Securities (MBS) issued by unregulated private-label securitization (PLS) conduits typically managed by investment banks.

As loan originators increasingly channeled mortgages through private-label PLS vehicles, GSEs lost influence over underwriting practices. This competition eroded GSE market share and empowered mortgage originators, playing a significant role in precipitating the 2008 financial crisis. Unlike GSEs—which guaranteed their MBS—private securitizers assumed minimal risk themselves and often transferred exposure via credit default swaps, thereby obscuring actual risk levels from investors.

The move toward higher-risk mortgages and private-label MBS was driven by financial institutions’ need to maintain earnings following the refinancing surge from 2001 to 2003 fueled by low interest rates. To sustain volume-driven profits, lenders increasingly targeted lower-credit borrowers and embraced riskier products—primarily adjustable-rate mortgages (ARMs)—which GSEs initially avoided. Under pressure from shareholders to reclaim market share, GSEs relaxed underwriting standards while FHA/Ginnie Mae preserved stricter criteria but ceded market presence.

The rapid growth of private-label securitization combined with inadequate regulation resulted in an oversupply of underpriced housing finance. By 2006, rising defaults—particularly on ARMs—triggered a wave of foreclosures. Declining home values coupled with tightened lending criteria intensified losses for GSEs backing a majority of U.S. mortgages. In response, the U.S. Treasury and Federal Reserve intervened in mid-2008 to stabilize Fannie Mae and Freddie Mac by extending access to low-interest financing and easing restrictions on stock purchases. Despite these efforts, shares of both companies fell more than 90% within one year.

2008 – financial turmoil and conservatorship

On July 11, 2008, U.S. authorities explored the possibility of a government takeover of Fannie Mae and Freddie Mac amid the ongoing housing market collapse. These institutions held or guaranteed a substantial share of American home mortgages, rendering them highly susceptible to the downturn. Additionally, policymakers considered enacting legislation to provide an explicit $5 trillion guarantee on their debt.

Fannie Mae's share prices sharply declined due to worries about its capital reserves and the risk of insolvency. Treasury Secretary Henry M. Paulson, along with the White House, publicly supported both companies to prevent widespread financial instability. Together with Freddie Mac, these entities were responsible for backing nearly half of the $12 trillion U.S. mortgage market, making their financial health vital for maintaining mortgage access and affordability. Their debt securities were broadly held worldwide by institutions such as governments and pension funds, meaning their failure would trigger significant international financial disruption.

Despite efforts to reassure markets, government mandates requiring Fannie Mae and Freddie Mac to purchase troubled loans from banks, coupled with the misclassification of AAA-rated loans at major financial institutions, further unsettled markets. Paulson chose immediate government conservatorship over providing loans similar to those extended to firms like AIG, cautioning President Bush about dire potential outcomes. Several leading banks faced legal claims totaling $200 billion concerning mortgage-related practices. Shareholders also initiated lawsuits against the federal government, alleging that regulatory interventions unlawfully forced the companies into conservatorship, infringing on constitutional rights.

On September 7, 2008, FHFA Director James Lockhart declared that Fannie Mae and Freddie Mac would enter conservatorship—marking the most extensive federal intervention in private financial markets in decades. The existing CEOs and boards were removed, while new senior preferred stock and warrants were issued to the Treasury Department, diluting prior shareholders' equity but safeguarding company debt and mortgage-backed securities values. The FHFA confirmed there were no intentions to liquidate either institution.

The Treasury's capacity to support Fannie Mae and Freddie Mac is constrained only by the federal debt ceiling. Legislation passed on July 30, 2008, enhanced regulatory oversight of these entities and increased the national debt limit by $800 billion to $10.7 trillion to facilitate potential Treasury assistance. This legal framework formed the foundation for the government's approach to managing systemic risks within the mortgage finance sector during the crisis.

2010 – removal from NYSE

On June 16, 2010, following more than 30 consecutive days with share prices below $1 per share as mandated by the Federal Housing Finance Agency, Fannie Mae and Freddie Mac were delisted from the New York Stock Exchange. Since that time, their shares have been traded on the Over-the-Counter Bulletin Board.

Dividend payments to federal government

In May 2013, Fannie Mae declared a dividend payment of $59.4 billion to the U.S. Treasury. By 2014, after receiving $116 billion in Treasury support, Fannie Mae paid back $134 billion in dividends. That year’s strong financial results enabled dividend returns totaling approximately $20.6 billion, bringing cumulative payments to around $134.5 billion by December 31, 2014—exceeding government support by roughly $18 billion. As of March 31, 2015, total distributions made to the Treasury were projected to reach $136.4 billion.

2015 ruling

On May 11, 2015, a U.S. District Court judge ruled unfavorably for Nomura Holdings Inc., determining that the company had provided false information regarding mortgage-backed securities sold to Fannie Mae and Freddie Mac. The decision supported the Federal Housing Finance Agency (FHFA), acting as conservator for these entities, and mandated that Nomura along with co-defendant RBS Securities Inc. pay revised damages. Initially, the FHFA sought approximately $1.1 billion in compensation for misrepresentations tied to mortgage-backed securities issued during the housing boom, which played a role in the financial losses and eventual government takeover of Fannie Mae and Freddie Mac in 2008. This lawsuit followed numerous settlements involving other financial firms that collectively resulted in $18 billion in penalties benefiting Fannie and Freddie. The court concluded that Nomura had overstated property values and inaccurately reported owner-occupancy statuses in its offering documents, thereby compromising disclosures related to loan quality and adversely affecting the investment portfolios of these government-sponsored enterprises.

Business

Fannie Mae’s revenue model involves borrowing funds at comparatively low interest rates and reinvesting those funds into whole mortgage loans and mortgage-backed securities (MBS). It secures capital by issuing bonds and provides liquidity to mortgage originators through purchasing whole loans, which it subsequently securitizes and sells to investors.

As a Government Sponsored Enterprise (GSE), Fannie Mae is obligated to supply liquidity to loan originators regardless of prevailing market conditions by purchasing loans that satisfy its underwriting criteria when alternative buyers are unavailable. Given the extensive scale of the U.S. residential mortgage market, Fannie Mae’s corporate debt is perceived as highly dependable, allowing it to borrow at favorable rates. The profit margin derived from the difference between its borrowing costs and lending returns—often referred to as "The big, fat gap"—has traditionally been a key driver of its earnings. By August 2008, its mortgage portfolio had grown beyond $700 billion.

A considerable portion of Fannie Mae’s earnings stems from guaranty fees charged for assuming credit risk on mortgages backing its MBS and retained loan portfolio. Investors accept these fees in return for Fannie Mae’s assurance of timely principal and interest payments even if borrowers default.

Historically, Fannie Mae’s charter restricted guarantees on loans with loan-to-value ratios exceeding 80% unless backed by mortgage insurance or repurchase agreements; however, during 2006 and 2007, it expanded its exposure by investing in subprime and Alt-A loans.

Business mechanism

Fannie Mae acquires mortgage loans from approved sellers, bundles them into mortgage-backed securities (MBS), and markets these securities with a guarantee ensuring prompt principal and interest payments. Its MBS are actively traded in the "to-be-announced" (TBA) market, which enhances liquidity within the U.S. housing finance system. By purchasing mortgages, Fannie Mae injects capital into financial institutions, enabling them to issue new loans and maintain market flexibility.

To uphold its guarantees, Fannie Mae establishes criteria for acceptable "conforming" loans. It developed an automated underwriting platform called Desktop Underwriter (DU) to assist lenders in assessing loan eligibility; in 2004, it launched Custom DU for tailored underwriting of nonconforming loans. The secondary market for nonconforming loans includes jumbo loans that exceed Fannie Mae’s purchase thresholds. Since early 2008, MBS eligible for TBA trading can contain up to 10% jumbo loans, expanding choices available to investors.

This operational framework forms the basis of Fannie Mae’s competitive edge in mortgage finance by effectively balancing risk control with the provision of market liquidity.

Conforming loans

The maximum loan amount that Fannie Mae and Freddie Mac will back is referred to as the "conforming loan limit," which is determined annually by the Office of Federal Housing Enterprise Oversight (OFHEO). Loans exceeding this threshold are categorized as non-conforming or jumbo loans. Notably, this limit is increased by 50% for properties in Alaska and Hawaii. The Government-Sponsored Enterprises (GSEs) exclusively acquire conforming loans to package into securities for the secondary market, which diminishes demand for non-conforming loans. These non-conforming loans generally carry higher interest rates, often ranging from 0.25% to 0.5% above conforming loan rates. During the financial crisis of 2008, the pricing premium on non-conforming loans surged to approximately 1% to 1.5%, reflecting reduced appetite for bonds lacking GSE backing.

Implicit guarantee and government support

Initially, Fannie Mae operated with an explicit government guarantee until 1968, when Ginnie Mae was spun off and retained that guarantee. Following this change, Fannie Mae became a privately held corporation chartered by Congress, equipped with a Treasury line of credit and functioning as a Government-Sponsored Enterprise (GSE) with an implicit government guarantee. This arrangement confined its activities to the mortgage sector and enhanced its ability to borrow funds, despite it not receiving direct government funding or explicit assurances on its securities’ repayment.

Although legal disclaimers state that Fannie Mae’s securities are not direct obligations of the U.S. government, the implied guarantee substantially reduced borrowing expenses—estimated to save about $2 billion yearly—and bolstered investor confidence. Leading economists and financial experts have recognized this implicit support as a crucial element in Fannie Mae’s financial strength and market presence.

Fannie Mae and Freddie Mac enjoy regulatory benefits including lower capital requirements compared to standard financial institutions, permitting capital-to-asset ratios below the typical 3%. This leverage amplifies returns during strong market conditions but also heightens vulnerability in downturns such as the subprime mortgage collapse. Furthermore, FNMA is exempt from most state and local taxation as well as certain Securities and Exchange Commission (SEC) filing mandates.

While money market funds must adhere to diversification rules limiting exposure to any single issuer to 5%, these restrictions do not apply to Fannie Mae and Freddie Mac debt, allowing funds to hold significant concentrations of their securities.

A report from the Congressional Budget Office in 1996 noted that although no direct federal appropriations were made, government support through unpriced benefits to these GSEs was valued at approximately $6.5 billion annually, underscoring their pivotal role in housing finance.

Accounting

FNMA utilizes various derivative instruments—including interest rate swaps, options, basis swaps, interest rate caps, swaptions, and forward-starting swaps—to hedge its cash flow fluctuations. The company actively manages its duration gap—the difference between asset and liability durations—to mitigate interest rate risk, aiming for a range between negative six months and positive six months. By April, this average duration gap had expanded to plus three months from zero in March.

Accounting dispute

In 2004, Fannie Mae became the subject of an investigation into its accounting methods following a report by the Office of Federal Housing Enterprise Oversight that identified extensive errors. By 2006, the company had allocated over $1 billion to finalize an internal audit, resulting in a restatement of $6.3 billion in earnings—significantly lower than the initially estimated $10.8 billion.

Issues regarding Fannie Mae’s financial operations and accounting practices existed prior to this controversy, with congressional hearings conducted as early as 2000. In December 2006, regulatory authorities filed civil lawsuits against CEO Franklin Raines, CFO J. Timothy Howard, and former controller Leanne G. Spencer. They were accused of manipulating earnings to inflate bonuses exceeding $115 million from 1998 through 2004, along with penalties amounting to approximately $100 million. After nearly eight years of legal proceedings, a 2012 summary judgment dismissed the charges against these executives due to lack of sufficient proof.

Conflict of interest

In June 2008, The Wall Street Journal disclosed that former Fannie Mae CEOs James A. Johnson and Franklin Raines had obtained loans at rates below market value from Countrywide Financial, a prominent buyer of Countrywide mortgages. This arrangement was part of the "Friends of Angelo" VIP loan program, which extended favorable loan terms to numerous Fannie Mae executives and legal personnel.

Both Fannie Mae and Freddie Mac have made political contributions to legislators serving on influential regulatory committees such as the House Financial Services Committee and Senate Banking Committee, thereby impacting legislation relevant to their sector.

2011 SEC allegations

In December 2011, the U.S. Securities and Exchange Commission charged six executives from Fannie Mae and Freddie Mac, including former CEO Daniel Mudd, with securities fraud. The SEC claimed these individuals authorized misleading disclosures that downplayed the risks associated with subprime loans during the height of the mortgage crisis. Former Freddie CFO Anthony "Buddy" Piszel resigned from CoreLogic after receiving an SEC inquiry but was not formally charged. His replacement, David Kellermann, died by suicide while employed at Freddie.

The SEC further accused Mudd of providing false testimony before Congress. Mudd responded by asserting that disclosures approved by government entities were used to protect current officials while disproportionately targeting former employees.

2011 litigation

During 2011, the FHFA initiated lawsuits against 18 leading financial firms, including JPMorgan Chase, alleging they sold mortgage-backed securities to Fannie Mae and Freddie Mac that carried greater risks than represented. These government-sponsored enterprises endured substantial losses amid the housing market downturn, necessitating a $187 billion federal bailout and remaining under FHFA oversight since 2008. Swiss bank UBS settled for $885 million concerning $6.4 billion in securities losses. The FHFA also reached confidential settlements with Citigroup and General Electric. JPMorgan faces claims related to $33 billion in securities sold by itself as well as Bear Stearns and Washington Mutual, with the FHFA seeking $4 billion in damages. Bank of America, which acquired Countrywide and Merrill Lynch during the 2008 crisis, is subject to claims involving $57 billion in mortgage bonds. Altogether, these cases involve over $200 billion in allegedly misrepresented securities. While most actions are civil in nature, no individual executives have faced criminal charges; federal investigations remain active, including one in Sacramento connected to Washington Mutual. JPMorgan’s proposed settlement addresses only civil liabilities and does not provide immunity against potential criminal prosecution.

Allegations of Kickbacks in 2013

In May 2013, federal authorities in Santa Ana, California, charged a former foreclosure specialist at Fannie Mae with receiving kickbacks from a real estate broker. In a separate matter, an employee initiated a wrongful termination lawsuit, claiming she was dismissed after voicing concerns about kickback practices dating back to 2009. These incidents underscore ongoing issues related to governance and regulatory compliance within Fannie Mae’s organizational framework.

Chief Executive Officers

Key Personnel

  • Board of Directors as of 2018
  • Renee Lewis Glover, independent director since January 2016
  • Michael J. Heid, independent director since May 2016
  • Robert H. Herz, independent director since June 2011
  • Antony Jenkins, independent director since July 2018
  • Diane C. Nordin, independent director since November 2013
  • Jonathan Plutzik, board chair from December 2018 and independent director since November 2009
  • Manuel "Manolo" Sánchez Rodríguez, independent director since September 2018
  • Ryan A. Zanin, independent director since September 2016
    • Executive Officers** (as of February 14, 2019):
    • David C. Benson, president
    • Andrew J. Bon Salle, executive vice president—single-family mortgage business
    • Celeste M. Brown, executive vice president and chief financial officer
    • John S. Forlines, senior vice president and chief risk officer
    • Jeffery R. Hayward, executive vice president and head of multifamily
    • Kimberly H. Johnson, executive vice president and chief operating officer
    • Stephen H. McElhennon, senior vice president and interim general counsel
    • Named Executives for 2018**
    • Hugh R. Frater, interim CEO beginning October 2018
    • Timothy J. Mayopoulos, CEO until October 2018
    • Celeste M. Brown, EVP and CFO from August 2018
    • David C. Benson, president from August 2018; previously EVP and CFO until August 2018
    • Andrew J. Bon Salle, EVP—single-family mortgage business
    • Jeffery R. Hayward, EVP and head of multifamily
    • Kimberly H. Johnson, EVP and COO starting March 2018; formerly EVP and chief risk officer until March 2018

Related Legislation

On May 8, 2013, Representative Scott Garrett introduced the Budget and Accounting Transparency Act of 2014 (H.R. 1872; 113th Congress) in the United States House of Representatives. The legislation aimed to alter the budgetary accounting for federal credit entities such as Fannie Mae and Freddie Mac, mandating that their expenses be recorded on a fair-value basis according to Financial Accounting Standards Board standards. This change would incorporate these agencies’ liabilities into the national debt total and display them explicitly within the federal budget, thereby improving budget transparency without modifying the programs themselves.

See also

External links

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