This entry contains information applicable to United States law only. The Federal National Mortgage Association (Fannie Mae) is the United States' largest corporation. With an overall value of nearly $1 trillion, the federally chartered Fannie Mae holds a unique place in the national mortgage market. Established by federal law in 1934, it was originally a New Deal program. Since the 1970s, it has been a privately owned, for-profit corporation that is regulated and overseen by the federal government. Its chief purpose is to buy federally guaranteed home mortgages on the secondary market, thus freeing lending institutions to make more funds available for new mortgages for low- to middle-income home buyers. Tighter federal regulation began in the early 1990s, even as critics in Washington, D.C., argued that Fannie Mae, which earned $2.14 billion in 1996, should be completely privatized.
A broad federal response to the Great Depression gave rise to Fannie Mae. In the 1930s, the national housing market was devastated when a tight supply of money coupled with a failure of banks made mortgage financing extremely difficult to secure. Congress responded first by creating the Federal Housing Administration (FHA) in 1934, a body charged with stabilizing the mortgage market by insuring home loans (National Housing Act of 1934, subch. II [12 U.S.C.A. §§ 1707-1715z-11 (1980)]). This measure was not enough, however, to salvage the mortgage market. In 1935, lawmakers created the Reconstruction Finance Corporation (15 U.S.C.A. § 601 [1983], repealed by Reorganization Plan of 1957 No. 1 [5 U.S.C.A. § 903 note (1977)]), and in 1938, they added a subsidiary, Fannie Mae (Federal National Mortgage Association Charter Act [12 U.S.C.A. §§ 1716-1723h (1980)]). Fannie Mae's federal charter required it to buy FHA-insured loans from mortgage lenders, thus increasing the supply of mortgage funds available for lending.
Fannie Mae played a major role in the post-World War II boom years in housing. Its portfolio grew after it was authorized to purchase Veterans Administration (VA) loans in addition to FHA loans, a measure that fueled an enormous expansion of housing in the late 1940s and 1950s. In 1954, the federal government began issuing stock in Fannie Mae as part of a plan to share responsibility for the corporation's financial health with lending institutions. It issued preferred stock to the Treasury Department and nonvoting common stock to mortgage lenders. For the latter, purchase of stock became a prerequisite for selling mortgages to Fannie Mae.
A shift to private ownership began in 1968. First, Congress split Fannie Mae into two entities: one retained the name Fannie Mae, and the other was called the Government National Mortgage Association (GNMA), under authority of title III of the National Housing Act (12 U.S.C.A. §§ 1716-1716b [1983]). Whereas GNMA, also called Ginnie Mae, was chartered to provide funding for federally assisted housing programs, the new Fannie Mae retained its original mission yet with a new source of funding: lawmakers wanted it to become self-sustaining through fees, stocks, and securities. In 1970, the federal government sold its share of stock to Fannie Mae for $216 million, severing its last financial tie to the corporation. Two years later, Fannie Mae expanded the scope of its investments by purchasing nonfederally guaranteed loans as well.
Despite its financial independence, the corporation remains closely linked by its charter to the federal government. Federal oversight remained, as did Fannie Mae's mission to provide services to low-, moderate-, and middle-income home buyers. During the 1970s and 1980s, the corporation grew enormously, particularly through the securities market, where it sold so-called mortgage-backed securities, which are pools of mortgage loans acquired from lenders for which the acquiring corporation earns guarantee fees. In 1996, Fannie Mae held $600 billion in these securities, had $325 billion in assets, and earned an annual profit of $2 billion. Its stock was actively sought, primarily because of profitability and a sense on Wall Street that the federal government would always back up the corporation in bad times. In fact, the enormous flow of money through Fannie Mae rivaled that of the nation's major lending institutions.
Calls for reform of Fannie Mae began in the 1980s. The antiregulatory administration of Ronald Reagan suggested privatizing it completely. But action only followed a scandal of the savings and loan industry, in which greed and mismanagement plunged many of the nation's thrifts into insolvency — at a cost to taxpayers of hundreds of billions of dollars.
Motivated to protect the federal government from suffering such losses again, Congress in 1992 passed the Federal Housing Financial Enterprises Safety and Soundness Act (Pub. L. No. 102-550, § 1301, 12 U.S.C.A. § 4501). The law tightened regulations governing Fannie Mae and related federally chartered financial institutions. Specifically, it requires that these institutions pass periodic review to ensure that they have adequate capital according to risk criteria determined by Congress. This oversight is conducted by the Office of Federal Housing Enterprise, a part of the Department of Housing and Urban Development. Under law, such a corporation must submit a plan to restore its capital levels if it fails review. Significant undercapitalization can lead to a conservator's being appointed to run the corporation. Congress also prohibited excessive executive and staff salaries. At the same time, it gave Fannie Mae additional responsibility for helping low-income home buyers.
Although Fannie Mae readily passed financial review through 1996, reformers still sought to privatize it fully. Critics argued that under its federal charter, it enjoyed advantages that amounted to $8 billion before taxes in 1995. They also pointed out that a federal bailout of Fannie Mae, in the event that it failed, would be far costlier than the federal rescue of the savings and loan industry had been.
In lieu of privatization, some critics called for charging Fannie Mae a federal user fee. The Congressional Budget Office added support to the reformers' claims in mid-1996 when it charged that Fannie Mae was an expensive means of providing federal subsidies to home buyers, estimating that the corporation "soaked up nearly $1 for every $2 delivered." Fannie Mae attacked the user fee proposal as "a tax on home-ownership" that it would pass on to home buyers (Calmes 1996). Some observers believe that the corporation's political clout will make such drastic reforms difficult to pass.
See: Housing and Urban Development Department.
