Fannie Mae isn’t actually part of the Federal government but is rather a Government Sponsored Enterprise (GSE), meaning that like its similarly folksy titled cousins Sallie Mae and Freddie Mac, it is an independent corporation that came into being as an act of Congress. Congress created Fannie Mae as part of the 1938 National Housing Act, one of Franklin Roosevelt’s New Deal initiatives to provide relief to Americans during the Great Depression. The enterprise’s mission was to provide lenders with incentives to give low and middle income Americans affordable mortgages, thus stimulating the then moribund housing market. In 1968, Lyndon Johnson allowed Fannie Mae to go public, selling shares in the corporation in order to fund the Vietnam War.
Here’s why Fannie Mae is so important to the housing market now. Fannie (along with Freddie Mac, which we’ll explain elsewhere) agrees to buy mortgages from approved lenders as long as they’ve been issued to pre-qualified buyers, and the loans don’t exceed Fannie Mae’s limit, which as of 2018, is $453,100 in most of the US, and $679,650 in high cost areas like New York and San Francisco. In addition to purchasing these mortgages, Fannie Mae also agrees to insure them in case of default. Fannie Mae will then bundle these loans together with a whole bunch of other mortgages of similar amounts and terms, and sell them on the secondary market as in what’s called mortgage-backed securities. For much of the second half of the 20th century, Fannie and Freddie provided great returns to those who invested in their publicly-traded stocks, and kept the housing market fluid by gobbling up the majority of all mortgages. The global economic meltdown of 2008 changed all that; Fannie and Freddie became insolvent, and the federal government had to inject $187.5 billion into them to keep them afloat. Since 2008 Fannie has been under control of the Federal Housing Finance Agency, and while hugely profitable again, must funnel nearly all those gains back to the US Treasury, a situation that may not end anytime soon.