Fannie Mae >From Wikipedia
The Federal National Mortgage Association (FNMA), colloquially known as Fannie Mae, was established in 1938 by amendments to the _National Housing Act_ (http://en.wikipedia.org/wiki/National_Housing_Act_of_1934) after the _Great Depression_ (http://en.wikipedia.org/wiki/Great_Depression) as part of _Franklin Delano Roosevelt_ (http://en.wikipedia.org/wiki/Franklin_Delano_Roosevelt) 's _New Deal_ (http://en.wikipedia.org/wiki/New_Deal) . Fannie Mae was established to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. Fannie Mae created a liquid _secondary mortgage market_ (http://en.wikipedia.org/wiki/Secondary_mortgage_market) and thereby made it possible for banks and other loan originators to issue more housing loans, primarily by buying _Federal Housing Administration_ (http://en.wikipedia.org/wiki/Federal_Housing_Administration) (FHA) insured mortgages. For the first thirty years following its inception, Fannie Mae held a monopoly over the secondary mortgage market. In 1954, an amendment known as the Federal National Mortgage Association Charter Act made Fannie Mae into "mixed-ownership corporation" meaning that federal government held the preferred stock while private investors held the common stock; in 1968 it converted to a privately held corporation, to remove its activity and debt from the _federal budget_ (http://en.wikipedia.org/wiki/Federal_budget_(United_States)) ._[11]_ (http://en.wikipedia.org/wiki/Fannie_Mae#cite_note-10) In the 1968 change, arising from the _Housing and Urban Development Act of 1968_ (http://en.wikipedia.org/wiki/Housing_and_Urban_Development_Act_of_1968) , Fannie Mae's predecessor (also called Fannie Mae) was split into the current Fannie Mae and the _Government National Mortgage Association_ (http://en.wikipedia.org/wiki/Government_National_Mortgage_Association) ("Ginnie Mae"). Ginnie Mae, which remained a government organization, supports FHA-insured mortgages as well as _Veterans Administration_ (http://en.wikipedia.org/wiki/United_States_Veterans_Administration) (VA) and _Farmers Home Administration_ (http://en.wikipedia.org/wiki/Farmers_Home_Administration) (FmHA) insured mortgages. As such Ginnie Mae is the only home-loan agency explicitly backed by the full faith and credit of the United States government. In 1970, the federal government authorized Fannie Mae to purchase private mortgages, i.e. those not insured by the FHA, VA, or FmHA, and created the _Federal Home Loan Mortgage Corporation_ (http://en.wikipedia.org/wiki/Federal_Home_Loan_Mortgage_Corporation) (FHLMC), colloquially known as Freddie Mac, to compete with Fannie Mae and thus facilitate a more robust and efficient secondary mortgage market. In 1981, Fannie Mae issued its first mortgage passthrough and called it a mortgage-backed security. The Fannie Mae laws did not require the Banks to hand out subprime loans in any way. Ginnie Mae had guaranteed the first mortgage passthrough security of an approved lender in 1968 and in 1971 Freddie Mac issued its first mortgage passthrough, called a participation certificate, composed primarily of private mortgages. 1990s In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992.The Act amended the charter of Fannie Mae and Freddie Mac to reflect Congress' view that the _GSEs_ (http://en.wikipedia.org/wiki/Government-sponsored_enterprise) "... have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return;" For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases and increased to 55% by 2007. In 1999, Fannie Mae came under pressure from the _Clinton administration_ (http://en.wikipedia.org/wiki/Presidency_of_Bill_Clinton) to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977. Additionally, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. In 1999, _The New York Times_ (http://en.wikipedia.org/wiki/The_New_York_Times) reported that with the corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s." Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is much larger than is commonly held._Nassim Taleb_ (http://en.wikipedia.org/wiki/Nassim_Taleb) wrote in _The Black Swan_ (http://en.wikipedia.org/wiki/The_Black_Swan_(Taleb_book)) : "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'".In his 2006 book, America's Financial Apocalypse, _Mike Stathis_ (http://en.wikipedia.org/wiki/Mike_Stathis) also warned about the risk of Fannie Mae helping to trigger the financial crisis: “With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s. This would certainly devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the derivatives market, leading to a global sell-off in the capital markets. Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects. At its bottom, I would estimate a 30 to 35 percent correction for the average home. And in ‘hot spots’ such as Las Vegas, selected areas of Northern and Southern California and Florida, home prices could plummet by 55 to 60 percent from peak values.” 2000s In 2000, because of a re-assessment of the housing market by _HUD_ (http://en.wikipedia.org/wiki/Hud_(housing)) , anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals. The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. As _Daniel Mudd_ (http://en.wikipedia.org/wiki/Daniel_Mudd) , then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families. "Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered _teaser rates_ (http://en.wikipedia.org/wiki/Teaser_rate) , interest-only, _negative amortization_ (http://en.wikipedia.org/wiki/Negative_amortization) and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors." On January 26, 2005, the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190) was first introduced in the Senate by Sen. _Chuck Hagel_ (http://en.wikipedia.org/wiki/Chuck_Hagel) . The Senate legislation was an effort to reform the existing GSE regulatory structure in light of the recent accounting problems and questionable management actions leading to considerable income restatements by the GSE's. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July 2005, the bill was never considered by the full Senate for a vote. Sen. John McCain's decision to become a cosponsor of S.190 almost a year later in 2006 was the last action taken regarding Sen. Hagel's bill in spite of developments since clearing the Senate Committee. Sen. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.190. At the same time, the House also introduced similar legislation, the Federal Housing Finance Reform Act of 2005 (H.R. 1461), in the Spring of 2005. The House Financial Services Committee had crafted changes and produced a Committee Report by July 2005 to the legislation. It was passed by the House in October in spite of President Bush's statement of policy opposed to the House version. The legislation met with opposition from both Democrats and Republicans at that point and the Senate never took up the House passed version for consideration after that. The mortgage crisis from late 2007 Following their mission to meet federal Housing and Urban Development _(HUD)_ (http://en.wikipedia.org/wiki/United_States_Department_of_Housing_and_Urban_Development) housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions." _(HUD 2002 Annual Housing Activities Report)_ (http://www.hud.gov/offices/hsg/gse/reports/2002aharfmacnarrative.pdf) Then in 2003-2004, the _subprime mortgage crisis_ (http://en.wikipedia.org/wiki/Subprime_mortgage_crisis) began.The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits, typically operated by investment banks. As mortgage originators began to distribute more and more of their loans through private label MBS, GSEs lost the ability to monitor and control mortgage originators. Competition between the GSEs and private securitizers for loans further undermined GSEs power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas the GSEs guaranteed the performance of their MBS, private securitizers generally did not, and might only retain a thin slice of risk. Often, banks would offload this risk to insurance companies or other counterparties through _credit default swaps_ (http://en.wikipedia.org/wiki/Credit_default_swap) , making their actual risk exposures extremely difficult for investors and creditors to discern. The shift toward riskier mortgages and private label MBS distribution occurred as _financial institutions_ (http://en.wikipedia.org/wiki/Financial_institution) sought to maintain earnings levels that had been elevated during 2001-2003 by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, _fixed-rate mortgages_ (http://en.wikipedia.org/wiki/Fixed_rate_mortgage) (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in the start of a sharp deterioration in mortgage underwriting standards.The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast, the wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share.[ ? ] The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages - particularly with adjustable rate mortgages _(ARM)_ (http://en.wikipedia.org/wiki/Adjustable-rate_mortgage) , caused a precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The _US Treasury Department_ (http://en.wikipedia.org/wiki/US_Treasury_Department) and the _Federal Reserve_ (http://en.wikipedia.org/wiki/Federal_Reserve) took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels. On Oct 21, 2010 FHFA estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely cost taxpayers $224–360 billion in total, with over $150 billion already provided. 2008 - Crisis and Conservatorship On July 11, 2008, the _New York Times_ (http://en.wikipedia.org/wiki/New_York_Times) reported that U.S. government officials were considering a plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisis. Fannie Mae and smaller Freddie Mac own or guarantee a massive proportion of all home loans in the United States and so were especially hard hit by the slump. The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies. Fannie stock plunged.Some worried that Fannie lacked capital and might go bankrupt. Others worried about a government seizure. U.S. Treasury Secretary _Henry M. Paulson_ (http://en.wikipedia.org/wiki/Henry_M._Paulson) as well as the White House went on the air to defend the financial soundness of Fannie Mae, in a last-ditch effort to prevent a total financial panic. Fannie and Freddie underpinned the whole U.S. mortgage market. As recently as 2008, Fannie Mae and the _Federal Home Loan Mortgage Corporation_ (http://en.wikipedia.org/wiki/Federal_Home_Loan_Mortgage_Corporation) (Freddie Mac) had owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. If they were to collapse, mortgages would be harder to obtain and much more expensive. Fannie and Freddie _bonds_ (http://en.wikipedia.org/wiki/Bond_(finance)) were owned by everyone from the _Chinese Government_ (http://en.wikipedia.org/wiki/Government_of_the_People's_Republic_of_China) , to _Money Market_ (http://en.wikipedia.org/wiki/Money_Market) funds, to the retirement funds of hundreds of millions of people. If they went bankrupt, all those investments would go to 0, and there would be mass upheaval on a global scale. The Administration PR effort was not enough, by itself, to save the GSEs. Their investments were simply too rotten, their managements had been too incompetent, and the market was tanking too quickly. Paulson knew that _Lehman Brothers_ (http://en.wikipedia.org/wiki/Lehman_Brothers) and other banks were in trouble and would soon require his attention; this meant that he would not have the staff or the time to deal with a long, drawn out Fannie and Freddie conflict. Paulson's plan was to go in swiftly and seize the two GSEs; he told president Bush that "the first sound they hear will be their heads hitting the floor". On September 7, 2008, James Lockhart, director of the _Federal Housing Finance Agency_ (http://en.wikipedia.org/wiki/Federal_Housing_Finance_Agency) (FHFA), announced that Fannie Mae and _Freddie Mac_ (http://en.wikipedia.org/wiki/Freddie_Mac) were being placed into _conservatorship_ (http://en.wikipedia.org/wiki/Conservatorship) of the FHFA. The action was "one of the most sweeping government interventions in private financial markets in decades". Lockhart also dismissed the firms' chief executive officers and boards of directors, and caused the issuance to the Treasury new senior preferred stock and common stock warrants amounting to 79.9% of each GSE. The value of the common stock and preferred stock to pre-conservatorship holders was greatly diminished by the suspension of future dividends on previously outstanding stock, in the effort to maintain the value of company debt and of mortgage-backed securities. FHFA stated that there are no plans to liquidate the company. The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008 law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling US$ 800 billion, to a total of US$ 10.7 Trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks. 2010 - Delisting On June 16, 2010, Fannie Mae and Freddie Mac announced their stocks would be delisted from the NYSE. The Federal Housing Finance Agency directed the delisting after Fannie's stock traded below $1 a share for over 30 days. Their stocks will continue to trade on the Over-the-Counter Bulletin Board as long as there is trader interest. Reports from the finance agency specified that the delisting had nothing to do with current or future company performance -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
