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What is the Federal National Mortgage Association?

By C. Mitchell
Updated May 16, 2024
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The Federal National Mortgage Association, colloquially known as Fannie Mae® or the FNMA, is a congressionally-chartered, government-backed mortgage lending company in the United States. The main goal of the Federal National Mortgage Association is to ensure that U.S. homebuyers can have access to affordable mortgage rates. The association does not itself issue mortgages, but purchases and underwrites existing mortgages from banks, which frees up money for the banks to continue lending. The association was created in 1938 during the Great Depression as a wholly government-owned entity. Its leadership and ownership structure has undergone several changes since then: it was once wholly independent, but as of 2010 was held in government conservatorship.

Since the creation of the Federal National Mortgage Association, mortgages have generally been more available and more affordable to American families. The association has made this possible by backing and underwriting single family, multifamily, and capital mortgages from banks across the country. In essence, the association purchases loans that banks have already made to consumers. This gives banks more money to lend out to new home buyers, and also backs the loans with the association’s interest payments and principal guarantees.

The association was federally-owned when it was created in 1938. At that time, the government itself was backing the mortgages that the association purchased. Several years later, in 1968, the association split in two. A new Federal National Mortgage Association was created as a private, shareholder-owned entity, and a Government National Mortgage Association was created as a wholly government organization, primarily charged with backing federally-insured loan programs. The Government National Mortgage Association is frequently referred to as Ginnie Mae®.

A third player entered the scene in 1970, when Congress chartered the creation of the Federal Home Loan Mortgage Corporation, usually known as Freddie Mac®, to mirror and compete with the Federal National Mortgage Association. The idea was that two independent mortgage lenders with government accountability would create healthy competition in the market, and would help to stabilize the availability of affordable housing and home loans throughout the United States. The Federal National Mortgage Association has always been bigger than the Federal Home Loan Mortgage Corporation, but the two are, as anticipated, competitors in the market.

Although independent, both entities were nonetheless required to operate within a set of strict lending parameters. Most importantly, the associations are only able to purchase and guarantee “conforming” loans. Whether a loan is considered “conforming” is determined by the Office of Federal Housing Enterprise Oversight. The calculus generally focuses on the credit history of the borrower, the duration of the loan, and the likelihood of timely repayment. Initially, a loan had to be relatively strict and secure to pass as conforming. Moving towards 2003, however, the standard loosened.

Faced with increasing competition from third-party lenders who were extending significant mortgages and loans for little, if anything, down, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation were permitted to accept similar loans as conforming. 2004 marked the start of the sub-prime mortgage crisis in the United States. In this crisis, borrowers increasingly became unable to pay their mortgages, and began defaulting. The lending banks, in turn, looked to the associations to make good on their guarantees. The volume of defaults and the number of guarantee payments threatened to break the associations. In 2008, the federal government again intervened, placing both the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation in government conservatorship.

Conservatorship is like a bail-out in the sense that the federal government has pledged to use tax dollars to assist the associations in making repayments they cannot afford. In this way, the associations will be able to continue doing business, despite their steep financial losses. As of 2010, the associations remain independent; the conservatorship affects some of their financial decisions, but it does not cost them their autonomy.

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