Fannie Mae and Freddie Mac Go Into Conservatorship
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The Federal National Mortgage Association (FNMA or Fannie Mae), Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), and Government National Mortgage Association (GNMA or Ginnie Mae) are all secondary market lenders. This means they buy mortgages from banks and other lending institutions, bundle them together, and sell them as mortgage-backed securities, thus making more funds available for mortgages. These entities guarantee the interest payments and principal on the mortgages to the security purchasers.
Both Fannie Mae and Freddie Mac are publicly traded companies owned by private investors, but they are also government-sponsored enterprises (GSEs). GSEs are treated differently from other financial institutions: they need less capital to operate, are exempt from certain taxes, and so on. Ginnie Mae is a corporation owned directly by the federal government, and is a part of the Department of Housing and Urban Development (HUD).
Fannie Mae was originally a government agency created as part of Roosevelt's New Deal program in 1938. Established to make mortgage funds uniformly available across the nation, it set requirements for the loans it would buy, called conforming loans, that helped to standardize national mortgage loan requirements.
In 1968, in an effort to cut the federal budget, Fannie Mae was made into a publicly traded company and Ginnie Mae was created to handle government-guaranteed mortgages. Freddie Mac was created in 1970 so that the privately owned Fannie Mae would not have a monopoly in the secondary mortgage market. Unlike Ginnie Mae securities, the securities issued by Fannie Mae and Freddie Mac are not guaranteed by the federal government.
By 2007, Fannie Mae and Freddie Mac owned or guaranteed approximately half of the mortgages in the US, for an estimated $5 trillion. When the economy started shrinking in 2007, borrowers began defaulting on their mortgages in an unprecedented fashion. The shares of Fannie Mae and Freddie Mac dropped around 90% in one year. To avoid a collapse of these lending giants, the Federal Housing Finance Agency (FHFA) placed both Fannie Mae and Freddie Mac under conservatorship in September 2008. Top executive in both companies have resigned, and the FHFA is revising the accounting systems as well as changing the way the companies are organized.
To add to their problems, the two mortgage behemoths have received subpoenas from the Attorney General's Office and the Securities and Exchange Commission to preserve certain documents relating to their accounting methods. Both institutions may eventually face a federal grand jury investigation.
In conservatorship, the federal government still does not directly guarantee the company securities, but it has committed to making up to $100 billion available to Fannie Mae and Freddie Mac in the form of loans and investments. The government has also paved the way for the Treasury to purchase the companies at a low cost if that becomes desirable.
The initial effect of these conservatorships is on the company investors, whose stock has gone down even further. The end result for the national mortgage market is still unknown. With the government bailout, it may be easier now for people to get loans to buy homes as interest rates come down. At least , government and investors hope that the conservatorships will produce an increased confidence in the mortgage markets that will help stabilize the housing economy. As this story unfolds, only time will tell if their hopes are realistic or not. [September 2008].