Last modified on December 4, 2019, at 22:41

Fannie Mae

Fannie Mae is the common name for the Federal National Mortgage Association (FNMA).[1] Fannie Mae is a company that deals in the secondary mortgage market.

A secondary mortgage market is where an investor, in this case the U.S. government, purchases, or re-imburses the original lender for the value of the principal so that the original lender doesn't have to wait 30 years to collect the money it is owed, and can create a new loan faster with the original principal. FNMA then packages loans together of similar value and credit worthiness and resells the loans to other investors, such as pension funds, etc.

FNMA is a New Deal agency founded in 1938 by the U.S. government which did more to benefit big Wall Street banks than it did the common man by allowing banks to re-lend the same money over and over again versus ordinary folks, who could scarcely afford a home during the Great Depression.

Beginning in 1997, FNMA started guaranteeing to purchase mortgages from loan originators on borrowers with demonstrated credit unworthiness, i.e. subprime borrowers or deadbeats. Some of these loans than were snuck in to larger packages of prime mortgages with guaranteed credit worthiness precipitating the 2008 financial crisis. As usual, politicians loosened the screws on borrowing and easy credit terms with the promise of "a home of your own" or "the American dream," to buy votes. And again when the system collapsed, it was poor people and renters who suffered most having to chip in to bailout the banks and non-creditworthy homeowners, and the loss of employment opportunities for a decade afterward.

Although remaining a government sponsored entity (GSE), the company began selling stock to the public in 1968. Fannie Mae has been described as middle class welfare.[2]

The company and its reputation were kept alive by the US Government (along with Freddie Mac) after making billions in loans available to borrowers with demonstratively poor credit histories. Many individuals and pension funds globally, who bought into the illusion of safety and security in a government backed entity, were wiped out when it faltered. It was placed in the conservatorship of another government sponsored enterprise, the Federal Housing Finance Agency (FHFA), in September 2008, for mismanaging its affairs. It currently guarantees against default about $5 trillion in mortgages of American homeowners—nearly half of all mortgages in the United States.

Loan bundling

Fannie does not lend money directly to consumers. Instead, it purchases bundles of loans that banks make on what is called the secondary market. Fannie Mae issues Guidelines to mortgage lenders on the documentation required from borrowers to conform to what Fannie Mae agrees to buy.[3] Qualifying guidelines primarily focus on income, credit reports, and loan to value.[4] By Fannie Mae guaranteeing purchase of bundles of mortgages from banks, lenders funds are quickly replenished and they are able to originate more loans.

When Fannie Mae purchases a mortgage from a loan originator, it is repackaged and sold in bundles to investment banks and other entities who market them globally with a credit rating stamp.[5]

Franklin Raines era

Franklin Raines served as Fannie Mae's Vice Chairman from 1991 to 1996 when President Bill Clinton[6] recruited him to serve in the White House as Director of the Office of Management and Budget for two years. In 1998 Raines returned to Fannie Mae as Chief Executive Officer (CEO). Big banks securitization of subprime loans was already underway,[7] but Raines had ideas to give mortgage lenders government guarantees against default by granting non-qualified borrowers, that is, borrowers with proven records of poor performance on their debt obligations, the assurance against loss by government backing.

Fannie Mae lowers guidelines for subprime borrowers 1999

Main article: Community Reinvestment Act

In 1999 Raines' Fannie Mae lowered its underwriting guidelines to expand into the subprime lending market,[8] a widely held contributing factor to the Financial crisis of 2007-08.

A strategic alliance forged at the same time between Countrywide Mortgage and Fannie Mae linked the growth of the two companies. The agreement was unique – there was not a general industry practice of giving a volume discount to a mortgage originator. In 2005, the two companies agreed to work together to expand lending to low-income borrowers.[9] Countrywide originated 20% of all subprime mortgages in the United States – an amount equal to 3.5% of U.S. GDP. Former DNC Chairman Christopher Dodd who headed up the Senate Banking Committee tasked with oversight of Fannie Mae and Countrywide did nothing to assess the risks to the financial system or curb the deal.

Countrywide and Fannie Mae further expanded their relationship with another strategic alliance agreement in 2005. During each quarter, Countrywide was required to sell to Fannie Mae at least 70 percent of all “Expanded Criteria Mortgages,” and at least 65 percent of those mortgages each month. Fannie Mae also agreed to “provide special marketing and other assistance” to Countrywide in its efforts to reach low-income borrowers. Both parties pledged to continue a “Favored Relationship” in which they were “committed to the business success of the other party.” The 2005 agreement required both companies to “maintain the complete confidentiality of the existence and terms of this agreement.”

Stiglitz and Orszag hired to calm fears 2001 - 2002

As worries about Fannie Mae's overexposure for securitizing nearly $1 trillion in debt grew, Raines' Fannie Mae hired Economist Joseph Stiglitz, former Clinton Special Assistant for Economic Policy Peter Orszag, and the Managing Director of their firm Jonathan Orszag to write a paper to calm fears. The conclusion made the fantastic claim that Fannie Mae's chance of insolvency were 1 in 500,000:

...the probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in 500,000 – and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs [government sponsored entities Fannie Mae and Freddie Mac] will become insolvent appears quite low.

Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.

...In the absence of Fannie Mae and Freddie Mac, mortgage risk would likely be held by large banks and other types of financial institutions, which themselves benefit from the perception that they are “too big to fail.” Fannie Mae and Freddie Mac are among the largest financial institutions in the country. Even in the absence of a GSE charter it is likely that they would continue to benefit from their size, since the government has intervened on behalf of other large institutions in the past....[10]

Stiglitz was awarded the Nobel Prize in Economics for 2001. When Fannie Mae went insolvent in 2008, throwing the planet into deep economic upheaval for the better part of the next decade, Fannie Mae removed the paper from its website.[11] And shortly after Peter Orszag was proven disastrously in error with his prediction of 1 in a half million chance of a Fannie Mae meltdown, President Barack Obama appointed Orszag to manage the U.S. government's finances as Director of the Office of Management and Budget.

Fraudulent accounting exposed 2003 - 2006

In 2004 the Securities & Exchange Commission's (SEC) chief accountant ruled that Fannie had improperly accounted for hedging transactions in its trillion-dollar portfolio of derivatives.[12] The SEC ordered it to restate it's earnings which were overstated by $11 billion. The Office of Federal Housing Enterprise Oversight declared the company was "significantly undercapitalized" using Fannie's "own unique methodology" for valuing derivatives. At $28.86 billion, Fannie's core capital was $2.98 billion, or almost 10%, below the required minimum. The U.S Justice Department joined the investigation.

Regulators found a culture of corruption under Franklin Raines where management reaped huge bonuses for themselves.[13] Auditors stated,

The image of Fannie Mae as one of the lowest-risk and `best in class' institutions was a facade...Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.

The auditor's report stated executives moved profits from one year to the next to assure they would meet company goals to receive undeserved bonuses and accused Fannie Mae of taking large and sometimes unprofitable risks that were not revealed to investors. Raines was forced out. The auditors report was only the beginning of the revelations that shook the world.

In April 2008 Raines agreed to pay $24.7 million in a settlement with the U.S. government.[14] Some proceeds from the settlement were used to help homeowners facing foreclosure.

Collapse and conservatorship 2008

Main article: Financial crisis of 2008

In 2007 and 2008, as the residential housing market experienced a sharp decline under the weight of widespread defaults by subprime borrowers, Fannie Mae suffered billions of dollars in losses. On September 6, 2008, Fannie Mae entered conservatorships overseen by the Federal Housing Finance Agency, and the U.S. Treasury Department began to make substantial purchases of Fannie Mae's senior preferred stock. As of December 31, 2011, Treasury had committed over $183 billion to support Fannie Mae and Freddie Mac.

Although it originally was expected to be temporary, the conservatorships have been in place ever since, and there is no end in sight. FHFA estimates that, by the end of 2014, between $220 and $311 billion in financial support will have been drawn from the Treasury, and FHFA's Acting Director has stated that taxpayers are unlikely to be fully repaid for their support.

As Fannie Mae was taken into conservatorship in September 2008 it was reported Barack Obama received more than $126,000 in contributions from the government sponsored entity, among the most of any political candidate for office since 1989.[15]

Cash contributions to political candidates 1989 - 2008

The top three recipients of individual campaign contributions from Fannie Mae employees under current FEC reporting guidelines since 1989 were all Democrats.[16]
No.1 Connecticut Senator and former DNC Chairman Chris Dodd
No.2 Illinois Senator and later President Barack Obama
No.3 Massachusetts Senator and later Secretary of State John Kerry


  1. Blaming Fannie and Freddie, Ben Zimmer, Visual Thesaurus, September 16, 2008
  2. Middle-Class Welfare State Is Invisible by Design, Ezra Klein, Bloomberg, 2012-03-01.
  3. Who is Fannie Mae Today? About Us.
  4. Loan to Value (LTV); loan size in relation to the properties appraised value. For example, at the time of the 2008 crash, 80% financing, or 80% LTV was the maximum amount Fannie Mae guidelines would approve for borrowers with qualifying credit scores without mortgage insurance (also known as foreclosure insurance, which can significantly increase the monthly payment). LTV thus can be manipulated through an inflated appraisal.
  5. True story. You can watch CNBC's House of Cards special here to see it; reporter David Faber travels to the small town of Narvik, Norway, which invested $200 million lured in by their AAA ratings and the assurance by Citigroup of their safety. The town has had to close schools, slash expenditure to the elderly, and cut back on fire department hours.
  6. Bill Clinton appointed Rahm Emanuel, later Obama Chief of Staff, to the Board of Directors of Fannie Mae's sister agency, Freddie Mac. Emanuel had no experience or qualifications for the position. Freddie Mac likewise was taken into conservatorship for mismanagement.
  8. Fannie Mae Eases Credit To Aid Mortgage Lending, Steven A. Holmes, New York Times, September 30, 1999.
  9. How Countrywide Used its VIP Loan Program To Influence Washington Policymakers, House Committee on Oversight and Government Reform, July 5, 2012, pp. 74-76.
  10. Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard, by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag. Fannie Mae Papers, Volume 1, Issue 2, March 2002, Conclusion p.6.
  11. Stiglitz and Orszags on Fannie Mae, David Henderson, November 9, 2009.
  12. Franklin Raines's Lost Gamble, Bloomberg Businessweek, December 21, 2004.
  13. `Arrogant and unethical': Fannie Mae to pay $400 million penalty, Robert Manor, Chicago Tribune, May 24, 2006.
  14. Franklin Raines to pay $24.7 million to settle Fannie Mae lawsuit, By MARCY GORDON, The Associated Press, April 18, 2008.
  15. Update: Fannie Mae and Freddie Mac Invest in Lawmakers, By Lindsay Renick Mayer, September 11, 2008.
  16. White House Fires Back at Times Over Housing Meltdown Story Fox News, December 22, 2008