Fannie Mae

Definition - What does Fannie Mae mean?

Established by the United States Congress in 1938, the Federal National Mortgage Association (Fannie Mae) is a government-sponsored enterprise that helps families buy, refinance or rent homes by providing loan opportunities within the secondary market for home mortgages.

Justipedia explains Fannie Mae

Fannie Mae was established to help lending companies and banks provide long-term mortgages, primarily by outlining the requirements that mortgages must meet to be readily traded. Requirements include limiting the size of the mortgage loans, establishing certain qualifying criteria for the home buyer, and determining the underwriting standards.

The lending companies then reduce the risk of lower interest rates and potentially riskier loans by pooling certain loans together when buying and selling them by guaranteeing timely payments of interest and principal payments to investors. Fannie Mae also offers certain protections against defaults, thus increasing the benefit of investing in the mortgage market.

In 2008, Fannie Mae was at the center of the housing crisis. In fact, many now believe that Fannie Mae's enforcement of mortgage underwriting requirements contributed to the predatory lending that occurred prior to the 2008 mortgage market collapse.

Specifically, Fannie Mae’s actions allowed certain lenders to issue too many high-risk subprime mortgages, which were packaged and passed to unsuspecting investors who had no knowledge of their inherent risks. This, in combination with Fannie Mae’s investment in certain risky loans and reducing certain underwriting standards in their securitization business, increased the incidence of fraud and default.

Eventually, many Americans lost their homes to foreclosure and the U.S. government, believing that further losses would be catastrophic for the U.S. economy, took control of the mortgage giant through conservatorship.

In 2011, however, the SEC sued Fannie Mae executives for securities fraud for making misleading statements about the company's exposure to subprime loans, or loans made to borrowers with weaker credit histories. According to the federal government, the SEC reported less than “one-tenth of the total volume that met that description.”

Unfortunately, for years following the housing crisis, U.S. taxpayers have had to paid billions of dollars to this enterprise to ensure that the housing market remains solvent.

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