Fannie Mae is officially the Federal National Mortgage association. The purpose is to boost home ownership and allow ease to funds in the mortgage market. Established in 1938 as apart of the New Deal, the purpose is to assist low-to-moderate income borrowers obtain home ownership.
Fannie Mae operates on the secondary mortgage market. They do not originate loans but allow the funds to flow to lenders by purchasing mortgages. These mortgages can be issued by credit unions, banks, thrifts and other financial institutions. There are two large purchasers of mortgages in the secondary market. The other organization know as Freddie Mac is also Congress backed.
Purchasing mortgages on the secondary market, Fannie Mae can then pool them together to complete a mortgage-backed security (MBS). This is an asset-backed security that is attached to a mortgage or bundle of mortgages. These mortgages which are technically owned by Fannie Mae are then purchased by institutions like insurance companies, investment banks, or pension funds. This guarantees payments of principle and interest towards the corresponding MBSs.
Fannie Mae has its own portfolio that is known as a retained portfolio. This type invests in its own and other institutions securities. To fund its retained portfolio, Fannie Mae issues debt called agency debt.
Buying mortgages from banks, credit unions, and lenders allows them the ability to continue distributing credit. If these loans were not bought by Fannie Mae then the banks would have debt and the lack of money to supply mortgages.
If Fannie Mae didn’t exist we would likely see more laxed requirements to get mortgages. Many lenders base their terms on those outlined by Fannie Mae.This allows the majority of those mortgages to be purchased on the secondary mortgage market by non- government entities. Liquidity could become an issue if the main purchaser of mortgages leaves the industry. The lenders remaining on the market could then make it more difficult for people to get mortgages if they don’t have the capital for the debt.
Fannie Mae is a government-backed entity that purchases mortgages that meet certain pre-requisite. The result of doing this the the freeing up of cash for both national and local banks to continue loaning credit. If mortgages have too relaxed underwriting demands like during the housing bubble of 2007-2008, Fannie Mae gets into some trouble. The continued en-devours of Fannie Mae make it possible for millions of Americans to get the home of their dreams with ease.
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