The Federal Home Loan Mortgage Association, known as "Fannie Mae," was set up in 1938 as a company to purchase FHA mortgages. In 1968, the charter was changed, making Fannie Mae eligible to buy conventional mortgages, too. The profit that Fannie Mae makes come from the difference between the interest rates paid by homeowners and what foreign lenders charge.
Created during the depression era to provide affordability, liquidity, and stability, Fannie Mae was created under the auspices of President Franklin Delano Roosevelt's New Deal to provide a steady flow of capital to facilitate homeownership to families across the United States and it's territories.
Today, Fannie Mae is a shareholder owned company that is mandated under a federal charter and operates in what is called, "the secondary money market," to expand the concept of affordable housing to local communities.
It operates under the premise of lending to home buyers at the lowest possible interest rates and to diminish the risk of home loss through foreclosure. Fannie Mae also provides mortgage companies and banks with the necessary funds to continue lending, even during time of economic instability.
When Fannie Mae was first established, it was basically a catalyst to expand the flow of money for home purchases in communites that suffered low economic development due in part to the inability of average citizens to obtain home loans and to gain a share of the American dream. Over the following years, Fannie Mae made it possible for millions of families to buy and own real estate while the company grew to become a true mortgage giant.
In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world. It became known as a Government Sponsored Enterprise or GSE.
Fannie Mae buys mortgages from lending institutions and then either hold them in investment portfolios or resell them as mortgage-backed securities to investors and plays a vital role in providing financing for the housing markets.
As a result of buying of buying and selling mortgages, the secondary money market was created which enabled Fannie Mae to borrow money from foreign and domestic investors at low interest rates because of the financial support that the company recieves from the U.S. Government.
The purpose of Fannie Mae was to focus on service, reliability, value, and liquidity as it works with a variety of lenders that participate in the long term health of the housing market, but in recent years, Fannie Mae has become marred in scandals that has prompted the U.S. government to take over day to day operations.
In September 2008, the federal government stepped in to prevent Fannie Mae and another GSE, Freddie Mac, from collapsing due to concerns over bad debt that both firms had accumulated due to a meltdown of the housing market. This meltdown was brought on by the subprime lending debacle that forced millions of homeowners into bankruptcy, default, and foreclosure and the rising number of bank failures around the country.
It has been estimated that shareholders lost over 70 percent of their investment and more losses were certain to come without government intervention. The losses are adding up to be in the billions of dollars, and to ensure the survivial of Fannie Mae and Freddie Mac, the federal government proposed plans to inject billions of dollars of taxpayers’ money into the companies.
This plan would have the federal government buy Fannie Mae and Freddie Macs' mortgage backed securities, and if necessary, by buying newly issued stock. The affects of the takeovers are being felt around the world as jittery investors wait to see what the future holds for them.