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Freddie, Fannie and Ginnie
(This article was originally written in 2003 - some of the links contained here have been updated. For recent mortgage and home ownership information and news, visit our Home and Mortgage Index
A long time ago, in a country far, far away... wait...the time was right, but the country was the good old U.S. of A. and we were in the throes of a Depression. It was such an event that it warrants being remembered with a capital letter before its name. My parents remember that time and it forever altered the way they did things. They were keenly aware of having nothing and working to make ends meet.
The government stepped in a variety of ways. They felt that the country needed a little help lifting itself out of this Depression, and did so by creating such agaencies as the Public Works Projects and the Fair Housing Act. The later created the government backed company Federal National Mortgage Asscociation.
This government program called FNMA or Fannie Mae for short was to created in 1938 as a company who would help low, moderate and middle income families realize what has been referred to as the "American Dream", home ownership.
In 1968, the company went public (meaning that it was offered to people who wanted to invest by purchasing shares) which would allow them to reach a broader section of the population. The company buys mortgages from lenders and provides money to continue allowing lenders to make home ownership possible for many people who wouldn't necessarily be able to qualify for a loan. The Congress continues to provide the charter under which the company operates but provides no financial backing. This government connection allows the company to operate under the guise of being federally backed, giving borrowers and lenders alike added security in the process.
In 1999, this became the official mission statement of the company:
Our Mission is to tear down barriers, lower costs, and increase
the opportunities for home ownership and affordable rental
housing for all Americans. Because having a safe place to call
home strengthens families, communities, and our nation as a
whole.
And since Fannie Mae is a publicly traded company, the main consideration is to produce a profit. In terms of assets, it is one of the largest corporations in America, and there is fairly good chance that if you are involved with a pension, or are using some insurance vehicle as an investment, you have a stake in the success of the company. Their issuance of Mortgage backed Securities which are basically (and I mean really basically) the offering of guaranteed returns to investors for buying into pools of mortgages that they or other lenders have approved of as creditworthy and profitable. To learn more about how this works, feel free to read this through several times. Needless to say, Fannie Mae has allowed many people the opportunity of borrowing what they need in order to buy what they want the most. A home.
Ginnie Mae, or GNMA, Government National Mortgage Association provides a link between capital markets (the lenders) and the Federal Housing markets. This makes Mortgage backed Securities more attractive to investors, such as pension funds and the like. The main difference between this company and Fannie Mae lies in the government backing. While the backing is only perceived in Fannie Mae, it is real in the case of a Ginnie Mae backed security or mortgage. 95% of all home loans through FHA (Federal Housing Authority) and the VA (Veterans Administration) are backed by GNMA.
What this means to the lender or the investor who buys their backed securities is that they will get paid, even if the borrower doesn't make the payments and defaults on the loan. This government backing does not allow them to make riskier bets on the mortgage market, but allows them to make available loans in a rural and urban areas that are not the most desirable lending atmospheres.
This company was originally part of its older sister, Fannie Mae, and was created as one of the recovery steps taken by the government during the Depression. The National housing Act created the FHA, which eventually charted the National Mortgage Association of Washington and then again as the Federal National Mortgage Association (FNMA, or Fannie Mae). This company became a mixed ownership company with the government owning preferred stock, while the public held the common stock. In 1968, this was further divided with Fannie Mae becoming wholly a public owned company traded on the NYSE, and Ginnie Mae was spun off as a government owned association.
So they do the same thing, with the exception of how the money is raised, whether publicly as a traded company, or privately as a government backed entity. Ginnie Mae, is the lending branch of HUD, which is the enforcement arm of the government insuring that housing and the purchase of housing is a nondiscriminatory event.
HUD is involved with the government as the strong arm of the Fair Housing Act, helping communities develop and grow into livable and viable places. The branch of HUD that works with lenders is the FHA (Federal Housing Administration). The FHA provides the loans, which have limits (to find out what they are, click here) but the down payment requirements are usually lower than conventional loans. The goal behind HUD is affordability. They want home ownership to become a reality.
And then there is Freddie Mac. This is also a governmental creation and in fact, five of the eighteen members of its board are appointed by the President. This company is also a buyer of mortgages on the secondary market. Like Fannie Mae, Freddie Mac provides money to lenders to continue their efforts at selling mortgages. This keeps the market liquid, which is just another way of saying that it will remain funded. Remaining funded means that money will be there it lend, and the interest rates are kept lower as a result. Money supply is the key element here. Freddie Mac, like Fannie Mae, is a publicly traded company and has been for thirty years.
In all likelihood, you have benefited from these companies at one time or another, and probably didn't even know how.
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