Fannie Mae
The United States Federal Government created the Federal National Mortgage Association (FNMA—aka Fannie Mae) in 1938 to establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). Fannie Mae buys mortgages on the secondary market, pools them and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases.
In 1968, the Federal National Mortgage Association was partitioned into two separate entities—one wholly owned by the government and known as the Government National Mortgage Association (Ginnie Mae), and the other to retain the name Federal National Mortgage Association (Fannie Mae). At this time Fannie Mae expanded its charter to buying other sorts of mortgages besides the government insured ones it had traditionally purchased.
Today, Fannie Mae is a consistently profitable American corporation. While it receives no direct government funding or backing it has certain looser restrictions placed on its activities than normal financial institutions. For example, it is allowed to sell mortgage backed securities with half the capital backing them up than is required by other financial institutions. Critics, including Alan Greenspan, say that this is only allowed because investors seem to think that there is a hidden, or implied, guarantee to the bonds that Fannie Mae sells . Although the company describes them as having no guarantee, nevertheless the vast majority of investors believe that the Government would prevent them from defaulting on their debt, and so buy bonds that are very low interest rates compared to the risk.
Conforming loans
Because of its stake in the mortgage market and because of its history, Fannie Mae (along with Federal Home Loan Mortgage Corporation (Freddie Mac)) sets the limit each year on the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a jumbo loan, and has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market, making the demand for non-conforming loans much less. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent.) The conforming loan limit is 50 percent higher in Alaska, Hawaii, Guam and the US Virgin Islands.
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