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- For the Chicago based chocolate confectionary, see Fannie May Confections, Inc..
The Federal National Mortgage Association (FNMA; ), commonly known as Fannie Mae, is a corporation sponsored by the United States Government. Created in 1938 to establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). Along with other government sponsored enterprises (GSEs), Fannie Mae buys mortgages on the secondary market, pools them and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases. The name "Fannie Mae" is a creative acronym-portmanteau of the company's full name that has been adopted officially for ease of identification (see "Companies" below for other examples).
History
In 1968, the Federal National Mortgage Association was partitioned into two separate entities—one wholly owned by the government and known as the Government National Mortgage Association (Ginnie Mae), and the other to retain the name Federal National Mortgage Association (Fannie Mae). At this time, Fannie Mae expanded its charter to buying other sorts of mortgages besides the government-insured ones it had traditionally purchased. Fannie Mae became fully private in 1970 *.
Business
Fannie Mae is a consistently profitable corporation. While it receives no direct government funding or backing, it has certain looser restrictions placed on its activities than normal financial institutions. For example, it is allowed to sell mortgage backed securities with half the capital backing them up than is required by other financial institutions. Critics, including Alan Greenspan, say that this is only allowed because investors seem to think that there is a hidden, or implied, guarantee to the bonds that Fannie Mae sells (*). Although the company describes them as having no guarantee, nevertheless the vast majority of investors believe that the Government would prevent them from defaulting on their debt, and so buy bonds at very low interest rates as compared to others having like risk.
The largest mortgage originator in the United States is Countrywide Financial, which is an almost exclusive Fannie Mae partner, although they have sold small amounts to some of the other GSEs. Countrywide's "loan production" during 2003 was $434.9 billion, of which most was sold to Fannie Mae.
While private mortgage originators like can securitize and sell the mortgages (bundled together as a type of bond) themselves, GSEs like Fannie Mae can borrow money from private investors at lower rates, and have a record of packaging and selling mortgages with greater success.
Conforming loans
Because of its stake in the mortgage market and because of its history, Fannie Mae (along with Freddie Mac) sets the limit each year on the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a jumbo loan, and has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market, making the demand for non-conforming loans much less. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent.) The conforming loan limit is 50 percent higher in Alaska, Hawaii, Guam and the US Virgin Islands.
Financials
FNMA is a financial corporation which uses derivatives to "hedge" their cash flow. Derivative products they use include interest rate swaps and options to enter interest rate swaps ("pay-fixed swaps", "receive-fixed swaps", "basis swaps", "caps and swaptions", "forward starting swaps"). Here's a guide through some of its financials and accounting.
- Article about its accounting: Barron's: Fannie Mae faces more income issues - Banks - Financial - Real Estate - Financial Services - General
- SEC filings: SEC - Company Information SEC EDGAR - 10-K 2003 (EDGAR Online) (FNM: SEC Filings for FANNIE MAE - Yahoo! Finance) (Investor Relations: SEC Filings)
"2002 earnings of $6.4 billion would have been overwhelmed by $8.9 billion in cash-flow hedging losses." (Page 124 - "Accumulated Other Comprehensive Income (Loss)" - "Net cash flow hedging losses on derivatives hedging debt").
"$3 billion in losses that were recognized in 2002-2003" (Page 122 - "Statements of Income" - "Other expenses" - "Debt extinguishments, net").
"$19 billion paid to settle underwater interest-rate swaps in those years." (Page 125 - "Cash-Flows" - "Cash flows from (used in) financing activities" - "Net payments to purchase or settle hedge instruments").
"interest rate swaps on its books rose from $23 billion in 2002 to $149 billion in 2003." (Page 79 - Table 30 "Cash flow hedges" - "Receive-fixed swaps").
"exclude its AOCI numbers from the calculations of capital" (Page 158 - "Core capital" is "Stockholders' Equity" excluding AOCI).
Duration gap
Main article: duration gap
"The company said that in April its average duration gap widened to plus 3 months in April from zero in March." "The Washington-based company aims to keep its duration gap between minus 6 months to plus 6 months. From September 2003 to March, the gap has run between plus to minus one month."- 17-May-04 8-K Regulation FD Disclosure
- Effective Duration Gap (months)
- July 2003: 6
- April 2004: 3
Accounting scandal
In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released this report on September 20th 2004 alleging widespread accounting errors, including shifting of losses so senior executives could earn bonuses.
"Federal National Mortgage Association"