What is Fannie Mae?

The Federal National Mortgage Association, commonly known as Fannie Mae, trades under the symbol FNMA of the New York Stock Exchange. It was established in 1938 by the United States Congress as a government-sponsored enterprise, or GSE. Although the company does not have an explicit guarantee of government support, it is considered too big to fail.

Fannie Mae is responsible for maintaining a secondary home mortgage market. By ensuring that mortgages that meet specific criteria can be easily negotiated between lending institutions and investment banks, it increases the ability of lenders to provide long-term mortgages. A direct benefit to consumers is that mortgage interest rates are lower than they would otherwise be. For example, so-called jumbo mortgages, which are larger loans than Fannie Mae will accept, typically carry an interest rate of up to 0.5% more.

The business of this company consists of the purchase and grouping of loans in compliance . Conforming loans must meet criteria set by Fannie Mae, including restrictions on loan size and borrower qualifications. By acquiring these loans, the company assumes the risk of borrowers defaulting and changing interest rates.

To hedge exposure to variable interest rates, Fannie Mae trades extensively in the financial derivatives market known as interest swaps . Interest rate swaps allow the company to sell a future series of unknown interest payments in exchange for a known series of short-term payments. Fannie Mae also buys and sells strips , mortgages in which the principal is traded separately, that is, "stripped", from the stream of interest payments it is expected to generate. A large global market for these mortgage-backed securities has evolved, largely due to the existence of Fannie Mae.

Fannie Mae is not required to file regular financial reports with the Securities and Exchange Commission (SEC), although it began doing so in 2002 under pressure from SEC investigators and Congress. In 2004, the SEC required the company to restate several years of earnings statements, claiming that previously reported earnings were actually multi-million losses. Later that year, its longtime CEO and CFO Franklin Raines and Timothy Howard were fired on charges of accounting fraud. While Fannie Mae's current management claims the accounting discrepancies are due to different interpretations of how to account for interest rate swaps, investigators allege earnings were misreported to allow for senior management bonuses. Notable critics of the company include Alan Greenspan, former chairman of the Federal Reserve Bank.

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