Fannie Mae case study

Essay by johnnie October 2008

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Fannie MaeThe Federal National Mortgage Association (Fannie Mae) was formed by the Congress in 1938 to bolster the housing industry during the economic "Depression". In the meantime, the Federal Home Loan Mortgage Corporation (Freddie Mac) was authorized to purchase the first lien, fixed-rate conventional mortgage loans. It was later chartered by Congress in 1970 under Title III of the Emergency Home Finance Act to securitize conventional residential mortgage loans. The main objective of Fannie Mae is to ease the availability and affordability of homeownership for the low- and middle-income homebuyers. Fannie Mae and Freddie Mac became publicly traded companies in later years, with the mission to help more families achieve the dream of homeownership. Fannie Mae and Freddie Mac are also known as the Government Sponsored Enterprises (GSEs).

Fannie Mae and Freddie Mac have their primary function confined to the management of direct loans. Although these two agencies were previously allowed to lend money directly to mortgage borrowers, and hold them in their portfolios, they are now specifically prevented from engaging in mortgage origination.

Fannie Mae and Freddie Mac are also assigned a public mission to provide special assistance to support certain subsidized housing programs. The major activities among Fannie Mae and Freddie Mac are to currently engage the provision of "default insurance" or "loan guarantees" to mortgage investors, commonly known as the Mortgage-backed securities (MBS). This protects investors from losses due to mortgage default and late payments. With the assurance that timely interest and principal payments are received, it becomes more attractive for public and institutional investors to invest in. This eventually enables mortgage lenders to replenish funds and to originate new loans. Thus, mortgages funding home purchases will consistently be available and affordable to homebuyers in every state across the USA. Both Fannie Mae and Freddie Mac are...