Federal National Mortgage Association (FNMA) history

Better known as Fannie Mae, the FNMA was created by an act of Congress in 1938 in order to further stabilize the market for residential mortgages during the Great Depression. The association was created as a wholly owned federal agency dedicated to purchasing federally guaranteed mortgages from lenders. As a result, the lenders would be free to loan more mortgages to potential homeowners.

Fannie Mae performs a wholesale function in the market. Originally, it was designed to buy mortgages guaranteed by the Federal Housing Administration and, later, veterans’ mortgages. During World War II, its functions were somewhat limited, but it began to increase its activities during the housing boom following the war. The agency was substantially revamped in 1954, when a housing act passed Congress. Although owned by the U.S. Treasury, Fannie Mae raised substantial funds on the bond markets, its traditional source of long-term funds.

The agency was privatized in 1968, when Congress passed the Housing and Urban Development Act. A new government agency was created at the same time—the Government National Mortgage Association, or Ginnie Mae. After this time, Fannie Mae operated as a private company, and its stock eventually was listed on the NEW YORK STOCK EXCHANGE. It expanded the scope of its operations, adding new mortgages to the list of qualified obligations it could purchase from lenders. Its function began to shift to the secondary market, while Ginnie Mae continued to buy guaranteed mortgages from lenders.

Fannie Mae also helped develop different types of mortgage-backed bonds that have come to dominate the mortgage market. Since its privatization, it has become known as a GOVERNMENTSPONSORED ENTERPRISE, or GSE—an agency originally founded by Congress and subsequently privatized but still bearing what is known as the implicit guarantee of the Treasury. In other words, if the agency should fail, the government ultimately would be forced to guarantee Fannie Mae’s obligations to its investors.

Fannie Mae’s activities dominate the residential mortgage market along with those of its smaller counterpart, the Federal Home Loan Mortgage Corporation, or Freddie Mac. Between them, they purchase about 60 percent of all new residential mortgages created. They have also become two of the largest users of interest rate derivatives among financial institutions. In 2003, the agency had to restate its earnings from previous years under criticism from Congress and accounting regulators.

While the value of the implicit guarantee has been widely debated, the agency remains one of the two largest guarantors and traders of mortgages, at times holding as much as 40 percent of all conforming residential mortgages.

See also FEDERAL HOME LOAN BANK BOARD.

Further reading

• Break, George, and Jack Guttentag. Federal Credit Agencies. Englewood Cliffs, N.J.: Prentice Hall, 1963. 
• Stanton, Thomas H. A State of Risk. New York: Harper- Business, 1991. 
• ———. Government-Sponsored Enterprise: Mercantilist Companies in the Modern World. Washington, D.C.: American Enterprise Institute, 2002. 
• Weicher, John. Housing: Federal Policies and Programs. Washington, D.C.: American Enterprise Institute, 1980.