Fannie Mae

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Fannie Mae is the common name for the Federal National Mortgage Association (FNMA). [1] Fannie Mae is a company that deals with the secondary mortgage market. It is a New Deal agency founded by the U.S. government to provide increased liquidity for mortgages. 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]

Fannie Mae lowers guidelines for subprime borrowers 1999

Main article: Community Reinvestment Act

In 1999 Fannie Mae lowered its underwriting guidelines to expand into the subprime lending market,[6] 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.[7] 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.”

Fraudulent accounting 1990s - 2006

Accounting problems at Fannie Mae first surfaced in 2003, and led to investigations by the Securities and Exchange Commission and U.S Justice Department. Regulators found a culture of corruption where management overstated earnings by $11 billion beginning in the Clinton era[8] and reaped huge bonuses for themselves[9]

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. The report issued in 2006 was only the beginning of the revelations that shook the world.

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.[10]

Cash contributions to political candidates 1989 - 2008

The top three recipients of campaign contributions from Fannie Mae under current FEC reporting guidelines since 1989 were all Democrats. [11]
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. Fannie Mae Eases Credit To Aid Mortgage Lending, Steven A. Holmes, New York Times, September 30, 1999.
  7. How Countrywide Used its VIP Loan Program To Influence Washington Policymakers, House Committee on Oversight and Government Reform, July 5, 2012, pp. 74-76.
  8. 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 of qualifications for the position. Freddie Mac likewise was taken into conservatorship for mismanagement.
  9. `Arrogant and unethical': Fannie Mae to pay $400 million penalty, Robert Manor, Chicago Tribune, May 24, 2006.
  10. Update: Fannie Mae and Freddie Mac Invest in Lawmakers, By Lindsay Renick Mayer, September 11, 2008.
  11. White House Fires Back at Times Over Housing Meltdown Story Fox News, December 22, 2008