Fannie Mae

In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992.[18] The Act amended the charter of Fannie Mae and Freddie Mac to reflect the Democratic Congress' view that the GSEs "have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return".[19] For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases[20] and increased to 55% by 2007.

In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act (CRA) of 1977.[21] In 1999, The New York Times reported that with the corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."[22]

Franklin Raines earned $90 million in salary and bonuses while he was head of Fannie Mae.[23]

In 2000, because of a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[24]

The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. As Daniel Mudd, then president and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences:

We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families. Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors."[25]

Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk was much larger than was commonly believed.[26] Nassim Taleb wrote in The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'".[27]

On January 26, 2005, the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190) was first introduced in the Senate by Sen. Chuck Hagel.[28] The Senate legislation was an effort to reform the existing GSE regulatory structure in light of the recent accounting problems and questionable management actions leading to considerable income restatements by the GSEs. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July 2005, the bill was never considered by the full Senate for a vote.[29] Sen. John McCain's decision to become a cosponsor of S.190 almost a year later in 2006 was the last action taken regarding Sen. Hagel's bill in spite of developments since clearing the Senate Committee. Sen. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.190.[30][31]

At the same time, the House also introduced similar legislation, the Federal Housing Finance Reform Act of 2005 (H.R. 1461), in the Spring of 2005. The House Financial Services Committee had crafted changes and produced a Committee Report by July 2005 to the legislation. It was passed by the House in October in spite of President Bush's statement of policy opposed to the House version, which stated: "The regulatory regime envisioned by H.R. 1461 is considerably weaker than that which governs other large, complex financial institutions."[32] The legislation met with opposition from both Democrats and Republicans at that point and the Senate never took up the House passed version for consideration after that.[33]

Following their mission to meet federal Housing and Urban Development (HUD) housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) had striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions".[34] Then in 2003–2004, the subprime mortgage crisis began.[35] The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization (PLS) conduits, typically operated by investment banks.

As loan originators began to distribute more and more of their loans through private label PLS's, the GSEs lost the ability to monitor and control loan originators. Competition between the GSEs and private securitizers for loans further undermined GSEs' power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis.

Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas the GSEs guaranteed the performance of their mortgage-backed securities (MBSs), private securitizers generally did not, and might only retain a thin slice of risk. Often, banks would offload this risk to insurance companies or other counterparties through credit default swaps, making their actual risk exposures extremely difficult for investors and creditors to discern.

The shift toward riskier mortgages and private label MBS distribution occurred as financial institutions sought to maintain earnings levels that had been elevated during 2001–2003 by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARM's), and in the start of a sharp deterioration in mortgage underwriting standards.[35] The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast, the wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share.[35]

The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance[35] that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages – particularly with adjustable rate mortgage loans (ARM), caused a precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get loans. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The US Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels.

On October 21, 2010 FHFA estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely cost taxpayers $224–360 billion in total, with over $150 billion already provided.[36]

On July 11, 2008, The New York Times reported that U.S. government officials were considering a plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisis.[37] Fannie Mae and smaller Freddie Mac owned or guaranteed a massive proportion of all home loans in the United States and so were especially hard hit by the slump. The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies.

Fannie stock plunged.[38] Some worried that Fannie lacked capital and might go bankrupt. Others worried about a government seizure. U.S. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae, in a last-ditch effort to prevent a total financial panic.[39][40] Fannie and Freddie underpinned the whole U.S. mortgage market. As recently as 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) had owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.[37] If they were to collapse, mortgages would be harder to obtain and much more expensive. Fannie and Freddie bonds were owned by everyone from the Chinese Government, to money market funds, to the retirement funds of hundreds of millions of people. If they went bankrupt there would be mass upheaval on a global scale.[41]

The Administration PR effort was not enough, by itself, to save the GSEs. Their government directive to purchase bad loans from private banks, in order to prevent these banks from failing, as well as the 20 top banks falsely classifying loans as AAA, caused instability. Paulson's plan was to go in swiftly and seize the two GSEs, rather than provide loans as he did for AIG and the major banks; he told president Bush that "the first sound they hear will be their heads hitting the floor", in a reference to the French revolution.[41] The major banks have since been sued by the Feds for a sum of $200,000,000, and some of the major banks have already settled.[42] In addition, a lawsuit has been filed against the federal government by the shareholders of Fannie Mae and Freddie Mac, for a) creating an environment by which Fannie and Freddie would be unable to meet their financial obligations b) forcing the executive management to sign over the companies to the conservator by (a), and c) the gross violation of the (fifth amendment) taking clause.

On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA. The action was "one of the most sweeping government interventions in private financial markets in decades".[43][44][45] Lockhart also dismissed the firms' chief executive officers and boards of directors, and caused the issuance to the Treasury new senior preferred stock and common stock warrants amounting to 79.9% of each GSE. The value of the common stock and preferred stock to pre-conservatorship holders was greatly diminished by the suspension of future dividends on previously outstanding stock, in the effort to maintain the value of company debt and of mortgage-backed securities. FHFA stated that there are no plans to liquidate the company.[43][44][45][46][47][48][49]

The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008 law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling US$800 billion, to a total of US$10.7 Trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks.[50][51][52]

On June 16, 2010, Fannie Mae and Freddie Mac announced their stocks would be delisted from the NYSE. The Federal Housing Finance Agency directed the delisting after Fannie's stock traded below $1 a share for over 30 days. Since then the stocks have continued to trade on the Over-the-Counter Bulletin Board.[53]

In May 2013, Fannie Mae announced that it is going to pay a dividend of $59.4 billion to the United States Treasury.[54]

• $116 billion received from Treasury[55]
• $134 billion paid to Treasury[56]

Fannie Mae's 2014 financial results enabled it to pay $20.6 billion in dividends to Treasury for the year, resulting in a cumulative total of $134.5 billion in dividends through December 31, 2014 – approximately $18 billion more than Fannie Mae received in support. As of March 31, 2015, Fannie Mae expects to have paid a total of $136.4 billion in payments to the Treasury.[57][58][59][60]

Fannie Mae is a purchaser of mortgages loans and the mortgages that secure them, which it packages into mortgaged-backed securities (MBS). Fannie Mae buys loans from approved mortgage sellers and securitizes them; it then sells the resultant mortgage-backed security to investors in the secondary mortgage market, along with a guarantee that the stated principal and interest payments will be timely passed through to the investor.. In addition, Fannie MBS, like those of Freddie Mac MBS and Ginnie Mae MBS, are eligible to be traded in the "to-be-announced," or "TBA" market.[63] By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.[64]

In order for Fannie Mae to provide its guarantee to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Fannie Mae produced an automated underwriting system (AUS) tool called Desktop Underwriter (DU) which lenders can use to automatically determine if a loan is conforming; Fannie Mae followed this program up in 2004 with Custom DU, which allows lenders to set custom underwriting rules to handle nonconforming loans as well.[65] The secondary market for nonconforming loans includes jumbo loans, which are loans larger than the maximum that Fannie Mae and Freddie Mac will purchase. In early 2008, the decision was made to allow TBA (To-be-announced)-eligible mortgage-backed securities to include up to 10% "jumbo" loans.[66]

Fannie Mae and Freddie Mac have a limit on the maximum sized loan they will guarantee. This is known as the "conforming loan limit". The conforming loan limit for Fannie Mae, along with Freddie Mac, is set by Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of both GSEs. OFHEO annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a non-conforming jumbo loan. The conforming loan limit is 50 percent higher in Alaska and Hawaii. The GSEs only buy loans that are conforming to repackage into the secondary market, lowering the demand for non-conforming loans. By virtue of the law of supply and demand, then, it is harder for lenders to sell these loans in the secondary market; thus these types of loans tend to cost more to borrowers (typically 1/4 to 1/2 of a percent). Indeed, in 2008, since the demand for bonds not guaranteed by GSEs was almost non-existent, non-conforming loans were priced nearly 1% to 1.5% higher than conforming loans.

Originally, Fannie had an 'explicit guarantee' from the government; if it got in trouble, the government promised to bail it out. This changed in 1968. Ginnie Mae was split off from Fannie. Ginnie retained the explicit guarantee. Fannie, however, became a private corporation, chartered by Congress and with a direct line of credit to the US Treasury. It was its nature as a Government Sponsored Enterprise (GSE) that provided the 'implied guarantee' for their borrowing. The charter also limited their business activity to the mortgage market. In this regard, although they were a private company, they could not operate like a regular private company.

Fannie Mae received no direct government funding or backing; Fannie Mae securities carried no actual explicit government guarantee of being repaid. This was clearly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Neither the certificates nor payments of principal and interest on the certificates were explicitly guaranteed by the United States government. The certificates did not legally constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae. During the sub-prime era, every Fannie Mae prospectus read in bold, all-caps letters: "The certificates and payments of principal and interest on the certificates are not guaranteed by the United States, and do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae." (Verbiage changed from all-caps to standard case for readability).[67]

However, the implied guarantee, as well as various special treatments given to Fannie by the government, greatly enhanced its success.

For example, the implied guarantee allowed Fannie Mae and Freddie Mac to save billions in borrowing costs, as their credit rating was very good. Estimates by the Congressional Budget Office and the Treasury Department put the figure at about $2 billion per year.[68] Vernon L. Smith, recipient of the Sveriges Riksbank Prize in Economic Sciences, has called FHLMC and FNMA "implicitly taxpayer-backed agencies".[69] The Economist has referred to "the implicit government guarantee"[70] of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae's (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail.[71]

Fannie Mae and Freddie Mac were allowed to hold less capital than normal financial institutions: e.g., they were allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions. Regulations exist through the FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%.[72] The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the subprime mortgage crisis. FNMA is exempt from state and local taxes, except for certain taxes on real estate.[73] In addition, FNMA and FHLMC are exempt from SEC filing requirements; they file SEC 10-K and 10-Q reports, but many other reports, such as certain reports regarding their REMIC mortgage securities, are not filed.

Lastly, money market funds have diversification requirements, so that not more than 5% of assets may be from the same issuer. That is, a worst-case default would drop a fund not more than five percent. However, these rules do not apply to Fannie and Freddie. It would not be unusual to find a fund that had the vast majority of its assets in Fannie and Freddie debt.

In 1996, the Congressional Budget Office wrote "there have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises... Government-sponsored enterprises are costly to the government and taxpayers... the benefit is currently worth $6.5 billion annually.".[74]

FNMA is a financial corporation which uses derivatives to "hedge" its cash flow. Derivative products it uses include interest rate swaps and options to enter interest rate swaps ("pay-fixed swaps", "receive-fixed swaps", "basis swaps", "interest rate caps and swaptions", "forward starting swaps"). Duration gap is a financial and accounting term for the difference between the duration of assets and liabilities, and is typically used by banks, pension funds, or other financial institutions to measure their risk due to changes in the interest rate. "The company said that in April its average duration gap widened to plus 3 months in April from zero in March." "The Washington-based company aims to keep its duration gap between minus 6 months to plus 6 months. From September 2003 to March, the gap has run between plus to minus one month."

In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report[75] on September 20, 2004, alleging widespread accounting errors.

Fannie Mae was expected to spend more than $1 billion in 2006 alone to complete its internal audit and bring it closer to compliance. The necessary restatement was expected to cost $10.8 billion, but was completed at a total cost of $6.3 billion in restated earnings as listed in Fannie Mae's Annual Report on Form 10-K.[76]

Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On June 15, 2000, the House Banking Subcommittee On Capital Markets, Securities And Government-Sponsored Enterprises held hearings on Fannie Mae.[77]

On December 18, 2006, U.S. regulators filed 101 civil charges against chief executive Franklin Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer. The three were accused of manipulating Fannie Mae earnings to maximize their bonuses. The lawsuit sought to recoup more than $115 million in bonus payments, collectively accrued by the trio from 1998 to 2004, and about $100 million in penalties for their involvement in the accounting scandal. After 8 years of litigation, in 2012, a summary judgment was issued clearing the trio, indicating the government had insufficient evidence that would enable any jury to find the defendants guilty.[78]

In June 2008, The Wall Street Journal reported that two former CEOs of Fannie Mae, James A. Johnson and Franklin Raines, had received loans below market rate from Countrywide Financial. Fannie Mae was the biggest buyer of Countrywide's mortgages.[79] The "Friends of Angelo" VIP Countrywide loan program included many people from Fannie Mae; lawyers, executives, etc.[80]

Fannie Mae and Freddie Mac have given contributions to lawmakers currently sitting on committees that primarily regulate their industry: The House Financial Services Committee; the Senate Banking, Housing & Urban Affairs Committee; or the Senate Finance Committee. The others have seats on the powerful Appropriations or Ways & Means committees, are members of the congressional leadership or have run for president.

• Hugh R. Frater (Oct 16, 2018–)
• Timothy Mayopoulos (2012–2018)
• Michael Williams (2009–2012 )
• Herbert M. Allison (2008–2009)
• Daniel Mudd (2005–2008)
• Franklin Raines (1999–2004)[90]
• James A. Johnson (1991–1998)
• David O. Maxwell (1981[91]-1991)
• Allan O. Hunter (1970–1981)[92]

• Board of Directors 2018
• Renee Lewis Glover, Age 69, Independent director since January 2016
• Michael J. Heid, Age 61, Independent director since May 2016
• Robert H. Herz, Age 65, Independent director since June 2011
• Antony Jenkins, Age 57, Independent director since July 2018
• Diane C. Nordin, Age 60, Independent director since November 2013
• Jonathan Plutzik, Age 64, Board chair since December 2018, Independent director since November 2009
• Manuel “Manolo” Sánchez Rodríguez, Age 53, Independent director since September 2018
• Ryan A. Zanin, Age 56, independent director since September 2016
  • Executive Officers, As of February 14, 2019, there are seven other executive officers:
  • David C. Benson, Age 59 President
  • Andrew J. Bon Salle, Age 53 Executive Vice President—Single-Family Mortgage Business
  • Celeste M. Brown, Age 42 Executive Vice President and Chief Financial Officer
  • John S. Forlines, Age 55 Senior Vice President and Chief Risk Officer
  • Jeffery R. Hayward, Age 62 Executive Vice President and Head of Multifamily
  • Kimberly H. Johnson, Age 46 Executive Vice President and Chief Operating Officer
  • Stephen H. McElhennon, Age 49 Senior Vice President and Interim General Counsel
  • Named Executives for 2018
  • Hugh R. Frater Interim Chief Executive Officer (beginning October 2018)
  • Timothy J. Mayopoulos Former Chief Executive Officer (until October 2018)
  • Celeste M. Brown Executive Vice President and Chief Financial Officer (beginning August 2018)
  • David C. Benson President (beginning August 2018) Former Executive Vice President and Chief Financial Officer (until August 2018)
  • Andrew J. Bon Salle Executive Vice President—Single-Family Mortgage Business
  • Jeffery R. Hayward Executive Vice President and Head of Multifamily
  • Kimberly H. Johnson Executive Vice President and Chief Operating Officer (beginning March 2018) Former Executive Vice President and Chief Risk Officer (until March 2018)

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