Mortgage-Backed Securities
After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities (MBS). MBS are asset-backed securities secured by a mortgage or pool of mortgages. Fannie Mae’s mortgage-backed securities are purchased by institutions such as insurance companies, pension funds, and investment banks. It guarantees payments of principal and interest on its MBS. ? ?
Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio. This invests in its own mortgage-backed securities as well as those from other institutions. Fannie Mae issues debt called agency debt to fund its retained portfolio. ? ?
The Financial Crisis
Fannie Mae has been publicly traded since 1968. ? ? Until 2010, it traded on the https://worldloans.online/title-loans-mt/ New York Stock Exchange (NYSE). It was delisted following the mortgage, housing, and financial crisis after its stock plummeted below the minimum capital requirements mandated by the New York Stock Exchange. It now trades over-the-counter. ? ?
Unethical lending practices led to the crisis. In 2007, the housing bubble burst, and hundreds of thousands of these borrowers went into default, which led to what was known as the subprime meltdown. This had a ripple effect on the credit markets, which sent the financial markets into a tailspin and created the most severe recession in decades in the United States.
Government Takeover and Bailout
In the latter half of 2008, Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Committee. At the time, both held $4.9 trillion in bonds and mortgage-backed securities. The U.S. Treasury provided $191.5 billion to keep both solvent. In essence, the U.S. government intervened in order to restore trust in the markets by promising to bail out bad loans and to prevent a further slump in the housing , the federal government has received $292 billion in dividend payments from Fannie Mae and Freddie Mac. ? ?
Credit Options
Fannie Mae now offers a number of different business initiatives and credit options to homeowners, working with lenders to help people who may otherwise have difficulties obtaining financing.
- HomeReady Mortgage: This product allows homeowners to secure financing and purchase a home with a low down payment. Borrowers qualify if they have low to moderate-income and a credit score below 620. People with scores above 620 get better pricing. ? ?
- 3% Down Payment: Another resource for homeowners who may not have access to enough funds to secure a large down payment. ? ?
- HFA Preferred: This program helps homeowners access affordable financing through local and state Housing Finance Agencies and other lenders. Income levels for borrowers are determined by the HFA, and there are no first-time buyer requirements. ? ?
- RefiNow: Fannie Mae offers low-income mortgage holders a new refinance option through their “RefiNow” program. The program requires a reduction in the homeowner’s interest rate by a minimum of 50 basis points and a savings of at least $50 in the homeowner’s monthly mortgage payment. In order to be eligible, homeowners must be earning at or below 80% of their area median income (AMI). ? ?
Loan Modifications
Following the mortgage meltdown, Fannie Mae began to focus on loan modifications. Since , Fannie Mae and Freddie Mac have completed roughly 2.37 million loan modifications. ? ? Loan modifications change the conditions of an existing mortgage to help borrowers avoid defaulting on their mortgages, ending up in foreclosure, and ultimately losing their home. Modifications can include a lower interest rate or extend the term of the loan. Loan modification can also lower monthly payments.