I had the opportunity to hear former Presidents Bill Clinton and George W. Bush speak at the annual Five Star REO Conference in Texas late last summer. (REO is an acronym for Real Estate Owned which is what foreclosures and bank owned properties are technically called.) Both Presidents Bush and Clinton spoke about the importance of housing to our economy and to the American way of life. Clinton spoke in relatively more detail about the future of Fannie Mae. He indicated that while the exact future of Fannie Mae is by no means clear, the service that it provides to both lenders and the economy in providing liquidity to home mortgage lenders is crucial to maintaining a vibrant and relatively free housing market in the United States.
In the last several years there has been much criticism of Fannie Mae, (and its sister company Freddie Mac), for having provided too much liquidity to lenders – under pressure from Congress – and the liability it has created for the United States Government. There can be little question that Fannie Mae worked as planned and backed the entire United States housing market, and as bad as things have been the last several years in housing, the situation would have been much worse had Fannie Mae not existed.
In the fall of 2008 the United States Treasury placed both Fannie Mae and Freddie Mac under conservatorship and liquidated the Preferred Stockholder’s equity position. The majority of Preferred Stockholders were banks and pension funds, thus spreading the damage. Common stock in both Fannie Mae and Freddie Mac remained listed and traded on the New York Stock Exchange until mid 2010 when the stocks were delisted. Both stocks continue to be traded over the counter but have lost substantial value. Conservatorship does not mean the Treasury owns Fannie Mae or Freddie Mac, ownership is still vested in the common stock shareholders, however conservatorship does mean that the common stock shareholders have lost all control over the operations of these institutions; a situation that will remain until such time as the conservator, the United States Treasury, determines the best course of action to take with these institutions. At this time the ultimate status of Fannie Mae is indeterminate. Congress has considered a number of actions to take but has not reached any agreement and has no legislation pending to resolve Fannie Mae or Freddie Mac’s future. Fannie Mae and Freddie Mac remain ill-liquid and under government conservatorship at this time, bankruptcy, revocation of charter and or break-up into smaller entities have all been considered.
By Dick Thackston CRB, ABR, ABRM, BrokerNH, MA & VT
About Fannie Mae
Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.
Fannie Mae operates in the U.S. secondary mortgage market. Rather than making home loans directly to consumers, we work with mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates. We fund our mortgage investments primarily by issuing debt securities in the domestic and international capital markets.
Fannie Mae was established as a federal agency in 1938, and was chartered by Congress in 1968 as a private shareholder-owned company. On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (FHFA) appointed FHFA as conservator of Fannie Mae. In September 2008, we also entered into an agreement with the U.S. Department of Treasury that was most recently amended in December 2009. Under the agreement, Treasury will provide us with capital as needed to correct any net worth deficiencies that we record in any quarter through 2012. The agreement is intended to ensure that we are able to continue providing liquidity and stability to the housing and mortgage markets.
Fannie Mae has three lines of business – Single-Family, Multifamily and Capital Markets – that provide services and products to lenders and a broad range of housing partners. Together, these businesses contribute to the company’s chartered mission to increase the amount of funds available in order to make homeownership and rental housing more available and affordable.
The FHA Administrator chartered Fannie Mae on February 10, 1938. The impetus for creation of Fannie Mae was twofold: the national commitment to housing and the inability or unwillingness of private lenders to ensure a reliable supply of mortgage credit throughout the country. The primary purpose of Fannie Mae was to purchase, hold, or sell FHA-insured mortgage loans that had been originated by private lenders. After World War II, Fannie Mae’s authority was expanded to include VA-guaranteed home mortgages.
1954 Charter Act
The Charter Act of 1954 provided the basic framework under which Fannie Mae operates today but did not remove it from direct federal control. The act removed government backing for borrowings used to fund Fannie Mae’s secondary market operations. It stipulated that Fannie Mae be exempt from all local taxes except property taxes, and provided for the Federal Reserve Banks to perform various services for Fannie Mae. The 1954 Charter Act also defined the path by which Fannie Mae’s secondary market operations would be transferred to the private sector: proceeds from gradual sales of common stock were to be used to retire Treasury-owned preferred stock in Fannie Mae.
1968 Charter Act
The 1968 Charter Act split Fannie Mae into two parts: Ginnie Mae and a reconstituted Fannie Mae. Ginnie Mae would continue as a federal agency and be responsible for the then-existing special assistance programs, and Fannie Mae would be transformed into a “government-sponsored private corporation” responsible for the self-supporting secondary market operations. The reconstituted Fannie Mae was to be stockholder-owned and managed. Fannie Mae retired the last of its government stock on September 30, 1968, and transformation to a government-sponsored private corporation was completed in 1970.
The 1968 Act provided the authority to issue Mortgage-Backed Securities (MBS).
The Act also established a regulatory structure to ensure Fannie Mae’s adherence to its public purpose. It provided for continuing HUD oversight of Fannie Mae, granting “general regulatory power … to insure that the purposes of this Title are accomplished.”
Emergency Home Finance Act of 1970
The Emergency Home Finance Act of 1970 created Freddie Mac and authorized it to create a secondary market for conventional mortgages. Parallel authority and limitations to deal in conventional mortgages were given to Fannie Mae.
To alleviate credit concerns raised by acquisition of conventional mortgages (that lack federal backing), several eligibility restrictions and/or risk sharing requirements were imposed on the mortgages Fannie Mae could buy.
The new law also required the HUD Secretary to provide prior approval of Fannie Mae’s “purchase” or “dealing in” conventional mortgages (later interpreted by HUD regulations in 1995 to require specific approval of new and different conventional “programs”).
Secondary Mortgage Market Enhancement Act of 1984
The Secondary Mortgage Market Enhancement Act of 1984 (“SMMEA”) clarified and modified several of HUD’s regulatory powers over Fannie Mae. It required HUD to respond within 45 days to any request for new program approval made by Fannie Mae under the Charter Act (with a 15-day extension permitted) and authorized Fannie Mae to purchase and deal in subordinate lien mortgages.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
The Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) of 1989 made regulation of Fannie Mae and Freddie Mac consistent. Until 1989, Freddie Mac was owned by the Federal Home Loan Bank System and its member thrifts and governed by the Federal Home Loan Bank Board (later reorganized into the Office of Thrift Supervision). FIRREA severed Freddie Mac’s ties to the Federal Home Loan Bank System, created an 18-member board of directors to run Freddie Mac, and subjected it to HUD oversight.
Also, the GAO and Treasury were instructed to conduct studies of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. These studies laid the foundation for comprehensive regulatory modernization for both Fannie Mae and Freddie Mac in 1992.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992
The Federal Housing Enterprises Financial Safety and Soundness Act (“FHEFSSA”) of 1992 modernized the regulatory oversight of Fannie Mae and Freddie Mac. It created the Office of Federal Housing Enterprise Oversight (“OFHEO”) as a new regulatory office within HUD with the responsibility to “ensure that Fannie Mae and Freddie Mac are adequately capitalized and operating safely.” OFHEO is funded by assessments on Fannie Mae and Freddie Mac and is authorized to act without HUD oversight on a range of regulatory issues enumerated in the statute. FHEFSSA established risk-based and minimum capital standards for Fannie Mae and Freddie Mac. And, it established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas.
The Housing and Economic Recovery Act of 2008
The Housing and Economic Recovery Act of 2008 (‘HERA’) strengthened governmental oversight of Fannie Mae and Freddie Mac. It established the Federal Housing Finance Agency (FHFA), which replaced OFHEO and HUD as Fannie Mae’s safety and soundness and mission regulator. Among other things, FHFA has broad authority to require Fannie Mae to hold capital above statutory minimum levels, regulate the size and content of our portfolio, and approve new mortgage products.