Federal National Mortgage Association Charter Act (1954)
Federal National Mortgage Association Charter Act (1954)
Julia Patterson Forrester
Excerpt from the Federal National Mortgage Association Charter Act
The purposes of this subchapter are to establish secondary market facilities for residential mortgages, to provide that the operations thereof shall be financed by private capital to the maximum extent feasible, and to authorize such facilities to—
- provide stability in the secondary market for residential mortgages;
- respond appropriately to the private capital market;
- provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be ← the return earned on other activities) ... ;
- promote access to mortgage credit throughout the Nation (including central cities, rural areas, and underserved areas) ... ; and
- manage and liquidate federally owned mortgage portfolios....
The Federal National Mortgage Association Charter Act (Charter Act) (68 Stat. 612) reorganized and reestablished the Federal National Mortgage Association (now called Fannie Mae), originally created in 1938, in order to encourage a secondary market for residential mortage loan, and in 1968 created the Government National Mortgage Association (Ginnie Mae) to take on some of the functions of Fannie Mae. In the secondary market, mortgage companies and other parties that originate mortgage loans sell the loans or interests in groups of loans to investors such as banks, insurance companies, pension funds, and individuals, as well as to Fannie Mae. These investors purchase loans or interests in loans as an alternative to other investments like stock, bonds, or real estate. The mortgage companies and other originators make money by charging fees for origination and in some cases by charging fees to collect loan payments from borrowers for the investors (called servicing the loans). Because the loans are sold after they are made, the originators do not need to have a lot of money in order to make a lot of loans.
By encouraging investment in home mortgages through the secondary market, the Charter Act is intended to make mortgage funds more readily available throughout the nation, especially in areas that have traditionally been underserved and to low- and moderate-income households. Before the growth of the secondary market, most home mortgages were made by local savings and loan institutions using funds from savings accounts of depositors. The number of loans that could be made by a savings and loan depended on the amount of deposits it held. The secondary market makes mortgage funds more available because so many types of companies can invest in the loans and because investors in one part of the country may buy loans made to homeowners in other areas. In addition, if more funds are available for making mortgage loans, then more borrowers, including low income borrowers, can get loans.
Fannie Mae had its origins during the Great Depression under the leadership of President Franklin D. Roosevelt. In the early 1930s the typical loan made for the purchase of a home had only a three- to five-year term. Homeowners were required to refinance their homes frequently, and when refinancing was not available, many Americans lost their homes to foreclosure. In addition, interest rates and the availability of home mortgage financing varied widely throughout the country. In response to these problems, President Roosevelt's National Emergency Council recommended the establishment of a program for long-term, federally insured mortages and the creation of national mortgage associations to purchase these mortgages. The National Housing Act of 1934 implemented these proposals. In 1938 the National Mortgage Association of Washington was created and later that year was renamed the Federal National Mortgage Association (now Fannie Mae). Fannie Mae was originally a government corporation that borrowed money by issuing government bonds to raise funds for the purchase of mortgages insured by the Federal Housing Administration (FHA) and, beginning in 1944, those guaranteed by the Veteran's Administration (VA) as well. In 1950 Fannie Mae became part of the Housing and Home Finance Agency that later became the Department of Housing and Urban Development (HUD)
LEGISLATIVE HISTORY AND FEATURES OF THE ACT
In the early 1950s traditional lenders complained to Congress that Fannie Mae competed unfairly with private companies because Fannie Mae, as part of a government agency, could borrow money to buy mortgages at lower interest rates than private lenders. Traditional lenders encouraged Congress to abolish Fannie Mae altogether or to make it a private company. As a compromise between the interests of traditional lenders and those parties who recommended keeping Fannie Mae and even expanding its operations, Congress passed the Charter Act as a part of the National Housing Act of 1954. The Charter Act reestablished and reorganized Fannie Mae. It made Fannie Mae a partially private entity, meaning it would be owned in part by shareholders. The Charter Act also gave Fannie Mae three functions:
- secondary market operations—purchasing of FHA-insured and VA-guaranteed mortgages to make mortgage funds more available throughout the country;
- special assistance—providing assistance for mortgages originated under housing programs for those unable to obtain adequate housing or for mortgages in general if necessary to stop a decline in home building;
- management and liquidation—managing and eventually selling the mortgages owned by the old Fannie Mae.
During the period after the Charter Act, Fannie Mae became the most important institution in residential mortgage finance by purchasing significant numbers of mortgages each year: 11 percent of all residential mortgages originated in 1957, 9 percent in 1960, and 18 percent in 1966.
In 1968 Congress enacted the Housing and Urban Development Act, which divided the functions of Fannie Mae between two entities. Fannie Mae became a government-sponsored private corporation and was allocated the secondary market operations of the former entity. Ginnie Mae remained a division of HUD and was given the special assistance and the management and liquidation functions of the former Fannie Mae. In 1970 the Emergency Home Finance Act authorized Fannie Mae to purchase conventional mortgages and created the Federal Home Loan Mortgage Corporation (Freddie Mac) which is now almost identical in its charter and functions to Fannie Mae. Finally, the Housing and Community Development Act of 1992 established the Office of Federal Housing Enterprise Oversight (OFHEO) as an office of HUD to monitor both Fannie Mae and Freddie Mac. The 1992 act also increased the role of both Fannie Mae and Freddie Mac in making mortgages available to borrowers with very low, low, and moderate incomes by requiring them to make money available for the purchase of these mortgages.
HOW FANNIE MAE WORKS
Fannie Mae is a government-sponsored entity. It is a private corporation owned by shareholders, but it operates under a federal charter that imposes restrictions on its activities while granting certain benefits that other private corporations do not enjoy. These benefits include exemption from state taxes, except for real property taxes, and exemption from federal securities laws. Under the Charter Act, the president appoints five of Fannie Mae's eighteen directors, while the rest are elected by shareholders.
Fannie Mae still purchases residential mortgages on the secondary market, including conventional mortgages as well as FHA-insured and VA-guaranteed mortgages. Fannie Mae purchases some residential mortgage loans to retain in its portfolio of investments; however, most of the loans that Fannie Mae purchases today are securitized. This means that Fannie Mae collects a group of similar home mortgage loans (called a pool of loans), then issues securities (called mortgage-backed securities) that represent an ownership interest in the pool of loans. Investors who purchase the securities are thus purchasing an interest, not in an individual loan, but in the pool of mortgage loans. Most of the securities are pass-through securities, which means that Fannie Mae collects principal and interest payments from the mortgages in the pools and passes them on to the investors who own the securities. Fannie Mae guarantees these payments to the investors. Because Fannie Mae is not a government agency, its guarantee is not backed by the full faith and credit of the federal government, but there is an assumption that the federal government would honor Fannie Mae's obligations in the event that Fannie Mae experiences financial trouble because of too many defaults on the loans it owns or with respect to which it guarantees payments. Securitization of mortgages by Fannie Mae makes more money available for mortgage loans by reducing the risk of investment in mortgage loans. An investor who purchases a mortgage loan risks the loss of that investment because the borrower may default on payment of the loan and foreclosure often does not leave the lender whole. By investing in mortgage-backed securities, an investor gets an interest in a portion of a large group of loans rather than in one loan, and the risk of loss is reduced since it is less likely that a large number of borrowers will default. Fannie Mae's guarantee of loan payments also reduces the risk of the investment.
Through its purchases and securitization of residential mortgage loans, Fannie Mae is the largest source of home mortgage financing in the nation. Fannie Mae and Freddie Mac together purchased 40 percent of all conventional mortgages originated in 2001. Also, because of Fannie Mae's successful involvement in securitizing mortgage loans, private companies have begun to securitize mortgage loans as well. Fannie Mae purchased $568 billion of residential mortgage loans and issued $515 billion of mortgage-backed securities in 2001. Fannie Mae thus facilitates the flow of money into the residential mortgage market in accordance with the purposes set out in its charter.
Fannie Mae facilitates a secondary market in other ways as well. In cooperation with Freddie Mac, Fannie Mae has developed standardized forms for use by lenders who make conventional mortgage loans. These forms are almost universally used by conventional lenders to facilitate the sale of their loans on the secondary market. Fannie Mae and Freddie Mac also maintain lists of approved private mortgage insurance companies. These companies make conventional mortgages more marketable by insuring investors in the mortgages against some of the risks of borrower default.
HOW GINNIE MAE WORKS
Ginnie Mae's primary activity today is to operate a program for guaranteeing mortgage-backed securities. Ginnie Mae does not issue securities but rather guarantees securities issued by mortgage lenders. The securities are backed by pools of loans guaranteed by the FHA, VA, and Rural Housing Service. These are mostly loans to low- and moderate-income homeowners and first-time home buyers. Thus, Ginnie Mae's program serves primarily these borrowers. Because the Ginnie Mae guarantee of the securities is backed by the full faith and credit of the federal government, the securities are desirable to investors. Thus Ginnie Mae also channels money into the residential mortgage market, particularly for low- and moderate-income homeowners. According to Ginnie Mae's web site, in 2002 Ginnie Mae reached the $2 trillion mark in its total guarantees of mortgaged-backed securities since it was formed in 1968.
The Charter Act has been successful in creating a secondary market for home mortgage loans and in making mortgage funds available throughtout the nation, but there are critics. Some critics say that Fannie Mae and Freddie Mac compete unfairly against entirely private companies that purchase and securitize loans because of the advantages they receive from the federal government. Critics also say Fannie Mae and Freddie Mac should be more heavily regulated by the federal government because the failure of either would cause such a great disruption in the operation of the secondary market. Finally, critics say that Fannie Mae and Freddie Mac have not been sufficiently involved in purchasing and securitizing loans to low income households. Ginnie Mae's program of guaranteeing mortgage-backed securities does serve low-and moderate-income borrowers, and Fannie Mae and Freddie Mac have increased their involvement in this area in recent years. Because of the strength of the secondary market and because of securitization, the home mortgage loan market today operated in an entirely different manner from its operation prior to the 1970s, and the availability of mortgage funds no longer depends on local savings and loans.
See also: housing and Urban Development act of 1965; National Housing Act.
Nelson, Grant, and Dale Whitman. Real Estate Finance Law. St. Paul, MN: West, 1994.
Federal National Mortgage Association. <http://www.fanniemae.com>.