The Federal National Mortgage Association, better known as Fannie Mae, is the nation’s largest secondary MORTGAGE financial institution. Fannie Mae was initially chartered during the GREAT DEPRESSION as a government-owned enterprise to buy federally insured mortgage LOANS. In 1968 Fannie Mae became a private, shareholder-owned company trading under the symbol FNM. It is the United States’ third-largest company in terms of ASSETS ($859 billion in 2002). Fannie Mae’s principal activity is SECURITIZATION of mortgage loans. Securitization is the purchase of loans from lenders in the United States and then issuing securities, backed by the loan agreements, to investors. Fannie Mae buys mortgage loans from SAVINGS AND LOAN ASSOCIATIONS, commercial banks, mortgage bankers, CREDIT UNIONs, and state and local housing-finance agencies. Fannie Mae then sells mortgage-backed securities to investors and mortgage lenders. Mortgage-backed securities, which provide low-risk, diversified portfolio returns to investors, are liquid investments that can be bought and sold through securities dealers. Mortgage lenders sell loans to Fannie Mae but receive a fee for handling mortgage payments and use the proceeds from the sale of the loan (the principal) to make new loans. The 1934 National Housing Act established the Federal Housing Administration (FHA), to be headed by a federal housing administrator. As one of the principal functions of the FHA, Title II of the act provided for the INSURANCE of home mortgage loans made by private lenders. Title III of the act provided for the chartering of national mortgage associations by the administrator. These associations were to be private corporations regulated by the administrator, and their chief purpose was to buy and sell the mortgages to be insured by FHA under Title II. Only one association was ever formed under this authority: the National Mortgage Association of Washington, formed on February 10, 1938, as a subsidiary of the Reconstruction Finance Corporation, a government CORPORATION. Later that same year its name was changed to the Federal National Mortgage Association. By amendments made in 1948, the charter authority of Fannie Mae’s administrator was repealed, and Title III became a statutory charter for the Federal National Mortgage Association. By revision of Title III in 1954, Fannie Mae was converted into a mixed-ownership corporation, its preferred stock to be held by the government and its COMMON STOCK to be privately held. It was at this time that Section 312 was first enacted, giving Title III the short title of Federal National Mortgage Association Charter Act. By amendments made in 1968, the Federal National Mortgage Association was partitioned into two separate entities: GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (Ginnie Mae) and Federal National Mortgage Association. Ginnie Mae remained in the government, and Fannie Mae became privately owned by retiring the government-held stock. Fannie Mae and its competitor, Freddie Mac (FEDERAL HOME LOAN MORTGAGE CORPORATION) are often at the center of financial-industry controversy. Because they were created as GOVERNMENT-SPONSORED ENTERPRISES and continue to have the implied backing of the federal government, Fannie Mae and Freddie Mac are able to raise funds in CAPITAL MARKETs at lower costs than competitors. They also maintain significant lobbying and campaign finance operations in Washington, D.C., designed to protect other benefits. (Fannie Mae and Freddie Mac donate millions of dollars annually to the major political parties.) Though Fannie Mae is not connected to the federal government, it is exempt from PROPERTY TAXES and from SECURITIES AND EXCHANGE COMMISSION (SEC) securities registration fees. (Fannie Mae and Freddie Mac are the second- and thirdlargest issuers of securities behind the U.S. Treasury.) Fannie Mae is also exempt from SEC quarterly and annual disclosure requirements. When it was created in the 1930s, Fannie Mae was needed to restore confidence to failing financial markets. Since it became a private corporation in 1968, other FINANCIAL INTERMEDIARIES have questioned the fairness of retaining special benefits for one private enterprise. Competitors have pressured Congress to restrict Fannie Mae’s advantages, including efforts to eliminate its emergency line of credit with the U.S. Treasury, ending its property-tax exemption, and requiring SEC disclosure. General Electric Capital, Wells Fargo, Household Finance, JP Morgan, Chase, and other financial institutions have funded FM Watch, an industry-lobbying group to challenge Fannie Mae and Freddie Mac. Fannie Mae refers to FM Watch as a “group of mortgage insurers, high-cost lenders and their allies who want to roll back Fannie Mae policies that cut costs to consumers.” Though it is a for-PROFIT business, Fannie Mae claims it “is in business to lower consumer costs and expand home ownership.” Another controversy surrounding Fannie Mae is its use of derivatives and purchase of lower-quality debt. Derivatives are CONTRACTs based on the changes in value of some underlying financial asset. Stock-options values are derived from the value of the stock they are tied to. Financial derivatives are complex, highly leveraged investments. In 1999 the Federal Reserve led the bailout of Long Term Capital Management, which became insolvent when its derivatives on the spread between short- and long-term INTEREST RATES proved wrong. Because Fannie Mae is exempt from some SEC disclosure requirements but also has a line of credit with the U.S. Treasury, congressional critics have asked whether Fannie Mae is creating RISK exposure for the federal government. In 1992 Congress created the Office of Federal Housing Enterprise Oversight (OFHEO) to ensure the CAPITAL adequacy and financial safety of Fannie Mae and Freddie Mac.