The 'big, beautiful' bang? Or, Fannie Mae be not

The Federal National Mortgage Association (FNMA, or Fannie Mae) was established in 1928 with the mandate of creating a liquid secondary market for residential mortgage loans. FNMA was privatised in 1968. The Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) was created in 1970, and given the same mandate as FNMA. 

These two enterprises are critical to the efficient functioning of the US mortgage finance market and for the multi-family finance markets, providing guarantees on most mortgage loans and on commercial mortgage loans secured by multi-family properties (apartments). The mission of these enterprises is to facilitate access to affordable housing.

A little history

In 2007, the US housing finance market began to collapse, causing a financial crisis. Fannie Mae and Freddie Mac were, in 2007, private companies. They each had a large, leveraged balance sheet. They each held a large balance of guaranteed agency mortgage-backed securities, and they also had large portfolios of non-guaranteed, or “non-agency” mortgage-backed securities.

As private companies, Fannie Mae and Freddie Mac looked like two of the largest hedge funds in the world.

With their credit guarantee obligations and their large mortgage securities portfolios declining in value, the GSEs struggled. In July 2008, a regulator was created for the GSEs called The Federal Housing Finance Agency (FHFA). The FHFA had the power to advance funds to the GSEs. In September 2008 the FHFA put the GSEs into conservatorship. The US Government purchased $189.5 billion in preferred equity and extended each company a $100 billion line of credit. The US Government took warrants to buy 79.9% ownership in both FNMA and FHLMC, and took control of the board and management.  

Currently, under conservatorship, the US Treasury Secretary, Scott Bessent, and FHFA Director, Bill Pulte, are key players in the privatisation efforts for the Trump administration. Both Bessent and Pulte have made clear that the most important metric in any privatisation scheme is that mortgage rates must not increase. A higher cost for mortgages would mean weakened affordability – it would dramatically reduce homeownership and/or housing affordability.

A big change

Today, 99% of all new mortgages in the US are guaranteed by a government sponsored entity or agency: 41% are explicitly guaranteed by the Government National Mortgage Association (GNMA), and 58% are guaranteed by FNMA or FHLMC.  Prior to the financial crisis in 2008, the percentage of mortgage loans that were guaranteed was less than 50%. The GSEs were key to stabilising the mortgage finance markets following the housing correction. Since the stabilisation and the conservatorship, there has been no de-stabilisation of the housing markets.

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