Blog Post Assignment 2
FIN 180
The History of Fannie Mae
The objective of this blog post is to gain greater insight into the history of Fannie Mae. Instead of looking at what Fannie Mae’s role is in the secondary mortgage market we shall explore how Fannie Mae was created and why, the early period of Fannie Mae, split of Fannie Mae into Freddie Mac and the Fannie Mae we know today. Although Fannie Mae was one of our answers to the Great Depression and worked wonderfully to help bring our country to where it is today; Fannie Mae is currently under much scrutiny as a result of the housing crisis in 2008.
Before the Great Depression the typical residential mortgage was interest only until maturity and had shorter terms, about five years, than our typical mortgages today, about thirty years. When their loans became due rather than paying off the principal people would usually refinance their loan. In 1929 the stock market crashed as well as unemployment rates began to increase. At this point, when the mortgages became due the banks would no longer refinance the mortgages and people were unable to pay off the balance resulting in defaulting mortgages and a record rate or foreclosures. According to Dr. Hansz, “The problem in the Great Depression was that the markets did not have enough capital (Hansz, 2010).”
In 1934, the United States Congress passed the Federal Housing Act, which under title three provided for the incorporation of private national mortgage associations. These private national mortgage associations were to create a national secondary mortgage market. However, since none of these associations had yet formed by 1938 the Federal Housing Administration, or FHA, charted the national Mortgage Association of Washington to create the national secondary mortgage market. Soon after, it became known as the Federal National Mortgage Association and Fannie Mae (Fannie Mae - - Company History). Fannie Mae originally began with a billion dollars of purchasing power which it used to help banks lend to middle and low income homebuyers who may not have been considered creditworthy before (Pickert, 2008).
Thirty years later, Fannie Mae had grown considerably and as a result of the toll the Vietnam War was taking on the national budget President Johnson took Fannie Mae off of the government balance sheet and Fannie Mae became a publicly traded company. A couple years later, Fannie Mae was split into Freddie Mac and Fannie Mae as we know it today. The split of Fannie Mae was to keep the company from becoming a monopoly and for the two companies to compete with one another (Pickert, 2008). During the late 1970’s a private secondary market for mortgages that did not conform began to emerge. These mortgages were mortgage backed securities that were not guaranteed by Fannie or Freddie Mac but by companies such as Bank of America and is known as the private-label market (CBO, 2010). Below is a graph that shows the annual issue volume and percentages of the issuance of mortgage-backed securities from 1995 to 2009.
(CBO, 2010)
Fannie Mae was a great help to getting America back on track after the Great Depression by creating a national secondary mortgage market. In fact, as a result of Fannie Mae’s success it was split to ensure that Fannie Mae did not become a monopoly. However, today Fannie Mae and Freddie Mac are sharing their portion of the blame for the 2008 housing crisis. There were several groups or individuals involved with a system that is the cause of this crisis. Fannie Mae and Freddie Mac are publically owned companies and even though they are Government Sponsored Enterprises, their objective was to increase their shareholder’s profit. As a result, Fannie Mae and Freddie Mac began participating in dangerous business practices to achieve those shareholder’s profits(Hansz, 2010).
Bibliography
CBO, C. B. (2010, December). Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market. Retrieved March 20, 2010, from Congress of the United States: Congressional Budget Office: http://www.cbo.gov/ftpdocs/120xx/doc12032/12-23-FannieFreddie.pdf
Fannie Mae - - Company History. (n.d.). Retrieved March 17, 2011, from FundingUniverse: http://www.fundinguniverse.com/company-histories/Fannie-Mae-Company-History.html
Hansz, J. A. (2010). Real Estate Analysis: Environments and Activities. Dubuque, IA: Kendall Hunt.
Pickert, K. (2008, July 14). A Brief History of Mannie Mae and Freddie Mac. Retrieved March 17, 2011, from Time: http://www.time.com/time/business/article/0,8599,1822766,00.html
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