Housing: What Are “Freddie” & “Fannie?”


FANNIE MAE: CREATED IN 1938 IN GREAT DEPRESSION: The U.S. government enacted the National Housing Act (NHA) in 1934, during the Great Depression, with a goal of making home mortgages more affordable. “Fannie Mae,” the Federal National Mortgage Association (FNMA), was formed under a 1938 amendment.

SECONDARY MORTGAGE MARKET INCREASED LOANS: As local banks had consumers sign Notes and Mortgages, they promptly turned around, and assigned their paperwork to Fannie Mae, in consideration for cash, so they could make even more loans, thereby increasing the level of home ownership. Fannie’s practice of buying mortgages from local lenders became known as the “secondary mortgage market.”

FANNIE WAS PRIVATIZED IN 1968: The Congress changed the nature of Fannie Mae in 1950 from a purely governmental agency, to a “mixed ownership corporation,” by allowing private investors to purchase their common stock. To completely remove Fannie Mae from the federal budget, it was converted in 1968 to a private corporation, with the authority to buy “private mortgages.”

“FREDDIE MAC” WAS FORMED IN 1970: Mortgages backed by government agencies, such as the FHA, VA, and FmHA, fell under the control of a new agency, known as Ginnie Mae, the Government National Mortgage Association. In 1970, it became part of the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as “Freddie Mac.”

MORTGAGES STARTED BEING SOLD AS SECURITIES: Private mortgages were sold and assigned to Fannie Mae, while government-backed paper was sent to Freddie Mac. Although Fannie no longer had a government guarantee, they still enjoyed a line of credit from the U.S. Treasury. Fannie and Freddie both started re-selling their mortgages as securities.

FANNIE ASSUMED GREATER RISK UNDER 1992 LAW: The Housing and Community Development Act of 1992, signed into law by President George H. W. Bush, was intended to make financing more affordable for low and moderate income people. While Freddie Mac maintained their traditional high standards, Fannie started taking risks in the sub-prime market in the 1990s.

EASY CREDIT FOR MORTGAGE LOANS: In the past, borrowers had to put up to 20% down and present tax returns and other documents that showed they were credit worthy. Lenders started bypassing traditional qualifying income documentation, and no longer insisted on down-payments.

VARIABLE INTEREST RATES DOOMED NOTES TO FAIL: Notes were drafted for short-term gain, by taking “interest only,” meaning borrowers would never pay off their mortgages. “Variable interest rates” were used instead of “fixed rates,” which allowed monthly payments to be increased at later dates to levels lenders knew, or should have known, borrowers could not afford.

FANNIE AND FREDDIE CONSUMED HALF OF MARKET: Fannie became the largest purchaser of risky mortgages sold by Countrywide Financial. Fannie and Freddie either owned or guaranteed about 5 trillion of debt.

MORTGAGE-BACKED SECURITIES TRADING GREW: Around 2003 and 2004, when evidence of a sub-prime mortgage crisis began to emerge, the market nevertheless continued trading in Mortgage-Backed Securities (MBS).

HIGHER INTEREST RATES LED TO FORECLOSURES: When higher amounts were charged under “adjustable rate mortgages,” borrowers with poor credit ratings, and no money down, simply walked away from properties in what became a foreclosure crisis.

FORECLOSURES CAUSED HOUSING PRICES TO DROP: Foreclosures and an excess housing supply, caused prices to drop, and they have remained down since then, because few now qualify for loans under traditional lending standards requiring down-payments, employment, and good credit ratings.

CONSERVATOR TOOK OVER FREDDIE & FANNIE: Freddie and Fannie were placed under a conservatorship by the Federal Housing Finance Agency in Sep. 2008. Their stocks, trading at less than $1 a share, dropped off the NYSE in 2010. The Federal Reserve has been granting low interest loans to Fannie and Freddie, which are estimated to ultimately cost the federal government between 224 and 360 billion.

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