Anonymous
Anonymous asked in Social ScienceEconomics · 1 decade ago

what does fannie mae do?

i asked this before and i was told that they buy mortgages. but what does that mean?i thought mortgages were loans you get by putting your house up for collateral. so fannie mae buys loans, and they put their houses up for collateral?

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  • 1 decade ago
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    Federal National Mortgage Association (FNMA aka Fannie Mae) is a Government Sponsored enterprise responsible for purchasing mortgages in the open market.

    When a bank makes a loan such as a mortgage, it has to use money from it's depositor to issue the loan. Obviously overtime these loans get repaid back, sometimes the bank cannot wait until it is payback time and needs access to cash now.

    As a result, a bank can try to sell your mortgage on the open market, generally something less than the total principal owed and the total interest expected to be collected.

    Fannie Mae was created to make these purchases to help ease the markets, especially in situations where banks may be strapped for cash. Also, even when banks are not strapped for cash, by having Fannie Mae take the mortgage off of a company's hand it frees up capital for banks to make additional loans which can have very positive benefits on the mortgage market.

    When a mortgage is purchased by Fannie Mae, the borrower likely will not be able to tell much of a difference and will continue making payments as agreed.

    The controversy with Fannie Mae comes from the fact that they purchased several non-comforming mortgages (or mortgages where applicants were required to not list their income, assets, or even whether they had a job or even if they did list them, they weren't checked).

    In any event, to better understand what happened, lets go back to 2006. Ben Beranke met with Hank Paulson (then treasury secretary) and George W. Bush (then President) expressing his concern in the fall in house prices and the freezing up of assets.

    You see, before 2006, many banks had made some really bad loans such as the ones described above and now that house prices were falling the day of reckoning was drawing near. To make matters worse, these non-comforming loans were actually off-limits to Fannie Mae until Government officials decided to allow them to get involved in this market. It was two fold, Government officials thought (1) this would provided the needed liquidity to get the market back on track (2) this would still be profitable as it had in the past.

    As expected, the banks dumped all of the toxic assets onto Fannie Mae. To make matters worse, the CEO of Fannie Mae hid these losses and cooked the books making it seem that these assets were much better than they really were (this was not the Government that did this but Fannie Mae).

    In any event, the scandal was uncovered when Fannie Mae could no longer make good on any of it's own debt obligations as it was borrowing to buy many of these assets. As a result the Government seized Fannie Mae and guaranteed all of their loans to keep the price of these assets from continuing to fall.

    The process of buying these loans is real important to the health of the economy and it was when the buying and selling came to a hault that the economy nearly collapsed and we were looking into the abyss. If anything Fannie Mae helped absorb a good bit of the shock that other banks would have felt. This certainly doesn't excuse the fact that they were cooking the books and had we seen the books, this problem may have been exposed to policymakers sooner, they still played a pivotal role making the crisis more manageable.

  • 4 years ago

    What Does Fannie Mae Do

  • meg
    Lv 7
    1 decade ago

    When a bank gives you a mortgage on a house they can keep it and collect the payments of the can sell it to investors for the amount they gave you plus and little extra to cover the cost they incurred doing the paper work and a little profit. Then who ever buys your mortgage get your payments because you owe them the money, not the bank. Fannie and Freddie are semi government agencies the were set up decades ago to promote home ownership that buy mortgages from banks, so the bank will have the money to make more loans. They get the money to buy mortgages by selling bonds at a lower interest rate than the mortgages so the can afford about 1% foreclosure rate on the mortgages they hold.

  • JimBob
    Lv 6
    1 decade ago

    Fannie is the hell hole of the US. Basically they buy the loan that the banks sell to people to buy a house. So the bank gives you 100k loan, then the bank turns and sells the loan to Fannie for 115k. Fannie hopes and prays you pay all your payments and makes the 85k in interest over the lifetime of the loan.

    Major problems were caused when Fannie and Freddie basically told banks we will buy anything! So banks went out and gave people 100k or more, that had no possible chance of paying for the loan, this resulted in a MAJOR housing bubble (meaning too many houses, built, sold at prices that were unrealistically high!) Keep in mind the bank is now making money regardless of whether or not the payments are being paid. Fannie and Freddie now have all of the risk, the banks just sold the horrible loans that Fannie and Freddie told them they would buy regardless of risk involved!

    Far too many people don't understand this. People love to demonize the banks, they were making money for their shareholders. Fannie and Freddie are the number 1 and 1a reason the US economy is where it is!

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  • 6 years ago

    This Site Might Help You.

    RE:

    what does fannie mae do?

    i asked this before and i was told that they buy mortgages. but what does that mean?i thought mortgages were loans you get by putting your house up for collateral. so fannie mae buys loans, and they put their houses up for collateral?

    Source(s): fannie mae do: https://shortly.im/KKb9Q
  • Anonymous
    5 years ago

    Interesting point, but I am not 100%

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