What is Fannie Mae?

Fannie Mae is a congressionally chartered, shareholder-owned company and the nation’s largest source of funds for home mortgages. It has committed to provide $1 trillion in targeted lending for 10 million homes by the end of the decade. The targeted lending will serve low- and moderate- income families, minorities, new immigrants, residents of central cities and other underserved areas, and people who have special housing needs.

Fannie Mae is responsible for maintaining a secondary market in home mortgages. By ensuring that mortgages meeting specific criteria can be readily traded among lending institutions and investment banks, Fannie Mae 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 loans larger than Fannie Mae will accept, generally carry an interest rate as much as one-half percent higher.

Fannie Mae's business consists of buying and pooling conforming loans. Conforming loans must meet criteria established by Fannie Mae, including restrictions on the size of the loan and qualifications of the borrower. When buying these loans, Fannie Mae assumes the risk of defaulting borrowers and changing interest rates.

To hedge the exposure to variable interest rates, Fannie Mae trades heavily in the market for financial derivatives know as interest rate swaps. Interest rate swaps allow Fannie Mae to sell a future series of unknown interest payments in exchange for a known series of payments over the near-term. Fannie Mae also buys and sells strips, mortgages in which the principal is traded separately, i.e. "stripped," from the stream of interest payments it is expected to generate. A large global market in 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 in 2002 it began to do so under pressure from SEC and Congressional investigators. In 2004, the SEC required Fannie Mae to restate several years of earnings statements, alleging that previously reported profits were in fact multi-billion dollar losses. In late 2004, Fannie Mae's longtime CEO and CFOs Franklin Raines and Timothy Howard were fired under allegations of accounting fraud. While current Fannie Mae management claims the accounting discrepancies are due to differing interpretations on how to account for interest rate swaps, investigators allege profits were misreported to allow for high management bonuses. Notable critics of Fannie Mae include Alan Greenspan, Chairman of the Federal Reserve Bank.