Fannie Mae

Fannie Mae (Federal National Mortgage Association) is a government-sponsored enterprise that purchases mortgages from lenders, guarantees mortgage-backed securities, and provides liquidity to the mortgage market. Fannie Mae is one of two dominant players in the U.S. secondary mortgage market (alongside Freddie Mac).

The role of Fannie Mae

Fannie Mae is part of the “plumbing” of the U.S. mortgage system:

1. Buys mortgages: Fannie Mae purchases mortgages from lenders (banks, mortgage companies) that originate them.

2. Securitizes mortgages: Fannie Mae pools mortgages and issues mortgage-backed securities backed by the mortgages.

3. Guarantees securities: Fannie Mae guarantees principal and interest on the MBS. This government implicit backing makes the securities very safe, allowing them to trade at yields close to Treasury bonds.

4. Provides liquidity: By buying mortgages, Fannie Mae frees up lender capital, allowing lenders to originate more mortgages. This liquidity is crucial to the mortgage market functioning.

Without Fannie Mae and Freddie Mac, mortgage lending would be much more expensive and less available. Lenders would have to hold mortgages long-term (illiquid, risky), pushing mortgage rates much higher.

Conforming loan limits

Fannie Mae (alongside Freddie Mac) sets maximum loan amounts for mortgages it will buy. These are called conforming loan limits. In 2024, the baseline conforming limit is $766,550 for single-family homes. In high-cost counties (CA, NY, NJ), limits are higher (up to $1.149M).

Lenders use these limits as pricing benchmarks: mortgages within the conforming limit (conforming loans) are cheaper to originate (they can be sold to Fannie Mae easily). Mortgages exceeding the limit (jumbo loans) are more expensive to originate because they cannot be sold to Fannie Mae.

History and crisis

Fannie Mae was chartered in 1938 as a government-sponsored enterprise (GSE). It was privatized in 1968, becoming a publicly traded company while retaining an implicit government guarantee.

During the 2008 financial crisis, Fannie Mae (and Freddie Mac) faced massive losses due to defaults on mortgages they had guaranteed. The government took control of both entities through a conservatorship, effectively nationalizing them. The companies remained in conservatorship thereafter, with the government holding senior preferred stock.

MBS market and TBA securities

Fannie Mae issues agency MBS through a “to-be-announced” (TBA) system. TBA MBS are sold before the specific mortgages are identified; the seller agrees to deliver mortgages meeting certain criteria (loan amount, rate, maturity).

TBA MBS are highly liquid (traded in massive volumes in the secondary market). This liquidity makes them attractive to investors and helps the mortgage market function smoothly.

Implicit government backing

Fannie Mae is a private company with private shareholders, but it has an implicit government guarantee: if Fannie Mae faces insolvency, the government will bail it out (as it did in 2008).

This implicit guarantee allows Fannie Mae to borrow very cheaply (at rates close to Treasury rates), and it passes this subsidy to borrowers in the form of lower mortgage rates.

Some policy makers argue this subsidy is inefficient (benefits homeowners and mortgage companies at taxpayer expense). Others argue it’s a good investment in housing stability. The debate continues.

Credit guarantees and insurance

Fannie Mae charges mortgage sellers (lenders) a guarantee fee (typically 0.25–0.5% of the loan) for the credit guarantee it provides. This fee compensates Fannie Mae for the risk of backing the MBS.

The guarantee covers credit risk (borrower default). It does not cover prepayment risk (borrowers refinancing). MBS investors bear prepayment risk.

Freddie Mac and competition

Freddie Mac (Federal Home Loan Mortgage Corporation) is the parallel GSE. Fannie Mae and Freddie Mac have overlapping roles; together they dominate the U.S. mortgage secondary market, originating/guaranteeing roughly 50% of U.S. mortgages.

The two are supposed to compete to keep mortgage costs down, though the degree of competition is limited given their duopoly status and identical implicit government backing.

Policy debates

The future of Fannie Mae and Freddie Mac remains contested:

• Some argue they should remain government-supported to keep mortgage rates low.
• Others argue they should be privatized and the government backing removed.
• Some propose reforming their mission to focus more on low-income housing.
• Others argue they should be broken up to reduce systemic risk concentration.

No major reforms have passed since 2008, and the two remain in conservatorship as of 2024.

See also