Turn on more accessible mode. Turn off more accessible mode. Skip Ribbon Commands. Skip to main content. Turn off Animations. Turn on Animations. Community Associations Continue Nationwide Growth. Log on using your CAI website password to ask questions, discuss ideas, search resources, strengthen your network, share best practices and help your community thrive. Learn More Professional Services Directory Find the professional service providers you and your association need.
When you need professional support, look no further than these CAI members. Learn More Job Market Are you an employer looking for professionals to hire? Or are you a job seeker looking for a new career opportunity? This should be your first stop. Originally chartered as the National Mortgage Association of Washington, the organization's explicit purpose was to provide local banks with federal money to finance home loans in an attempt to raise levels of home ownership and the availability of affordable housing.
As such, Ginnie Mae is the only home-loan agency explicitly backed by the full faith and credit of the United States government. In , the federal government authorized Fannie Mae to purchase conventional loans, i. In , Fannie Mae issued its first mortgage passthrough and called it a mortgage-backed security. Ginnie Mae had guaranteed the first mortgage passthrough security of an approved lender in  and in Freddie Mac issued its first mortgage passthrough, called a participation certificate , composed primarily of private mortgage loans.
In , President George H. Bush signed the Housing and Community Development Act of In , Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act CRA of But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the s.
In , because of a re-assessment of the housing market by HUD , anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In , these rules were dropped and high-risk loans were again counted toward affordable housing goals. The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit.
As Daniel Mudd , then president and CEO of Fannie Mae, testified in , instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences:. We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term.
We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families. Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates , interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans.
In early we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers.
Does it make sense for borrowers to take on risk they may not be aware of?
The Mortgage Application Form
Are we setting them up for failure? As a result, we gave up significant market share to our competitors. But not to worry: Chuck Hagel. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July , the bill was never considered by the full Senate for a vote. John McCain's decision to become a cosponsor of S. Hagel's bill in spite of developments since clearing the Senate Committee. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.
It was passed by the House in October in spite of President Bush's statement of policy opposed to the House version, which stated: Following their mission to meet federal Housing and Urban Development HUD housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks FHLBanks had striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a year fixed-rate mortgage with a low down payment As loan originators began to distribute more and more of their loans through private label MBSs, GSEs lost the ability to monitor and control loan originators.
Competition between the GSEs and private securitizers for loans further undermined GSEs' power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas the GSEs guaranteed the performance of their MBSs, private securitizers generally did not, and might only retain a thin slice of risk.
The shift toward riskier mortgages and private label MBS distribution occurred as financial institutions sought to maintain earnings levels that had been elevated during — by an unprecedented refinancing boom due to historically low interest rates. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not initially securitize. Thus, the shift away from GSE securitization to private-label securitization PLS also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages FRMs to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages ARM's , and in the start of a sharp deterioration in mortgage underwriting standards.
The 1003 Mortgage Application Form
Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance  that led, in , to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages — particularly with adjustable rate mortgage loans ARM , caused a precipitous increase in home foreclosures.
As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get loans. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages.
In July , the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The US Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans at similar rates as commercial banks and removing the prohibition on the Treasury Department to purchase the GSEs' stock.
Fannie stock plunged. Others worried about a government seizure. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae, in a last-ditch effort to prevent a total financial panic. Fannie and Freddie bonds were owned by everyone from the Chinese Government , to money market funds , to the retirement funds of hundreds of millions of people.
If they went bankrupt there would be mass upheaval on a global scale. Their government directive to purchase bad loans from private banks, in order to prevent these banks from failing, as well as the 20 top banks falsely classifying loans as AAA, caused instability. Paulson's plan was to go in swiftly and seize the two GSEs, rather than provide loans as he did for AIG and the major banks; he told president Bush that "the first sound they hear will be their heads hitting the floor", in a reference to the French revolution.
The action was "one of the most sweeping government interventions in private financial markets in decades". The value of the common stock and preferred stock to pre-conservatorship holders was greatly diminished by the suspension of future dividends on previously outstanding stock, in the effort to maintain the value of company debt and of mortgage-backed securities. FHFA stated that there are no plans to liquidate the company. The authority of the U. Treasury to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to.
Since then the stocks have continued to trade on the Over-the-Counter Bulletin Board. Fannie Mae makes money partly by borrowing at low rates, and then reinvesting its borrowings into whole mortgage loans and mortgage backed securities.
Freddie Mac, Fannie Mae Release Uniform Condominium Questionnaire Initiative
It borrows in the debt markets by selling bonds, and provides liquidity to loan originators by purchasing whole loans. It purchases whole loans and then securitizes them for the investment market by creating MBS that are either retained or sold. It must legally ignore adverse market conditions which appear to be unprofitable. If there are loans available for purchase that meet its predetermined underwriting standards, it must purchase them if no other buyers are available. Because of the size, scale, and scope of the United States single-family residential and commercial residential markets, market participants viewed Fannie Mae corporate debt as having a very high probability of being repaid.
Fannie Mae is able to borrow very inexpensively in the debt markets as a consequence of market perception. There usually exists a large difference between the rate at which it can borrow and the rate at which it can 'lend'. This was called "The big, fat gap" by Alan Greenspan.
Fannie Mae also earns a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on mortgage loans underlying its single-family Fannie Mae MBS and on the single-family mortgage loans held in its retained portfolio. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk; that is, Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults.
Fannie Mae is a purchaser of mortgages loans and the mortgages that secure them, which it packages into MBS. Fannie Mae buys loans from approved mortgage sellers and securitizes them; it then sells the resultant mortgage-backed security to investors in the secondary mortgage market , along with a guarantee that the stated principal and interest payments will be timely passed through to the investor. This gives the United States housing and credit markets flexibility and liquidity. In order for Fannie Mae to provide its guarantee to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans.
Fannie Mae produced an automated underwriting system AUS tool called Desktop Underwriter DU which lenders can use to automatically determine if a loan is conforming; Fannie Mae followed this program up in with Custom DU, which allows lenders to set custom underwriting rules to handle nonconforming loans as well. Fannie Mae and Freddie Mac have a limit on the maximum sized loan they will guarantee. This is known as the "conforming loan limit". OFHEO annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a non-conforming jumbo loan.
The conforming loan limit is 50 percent higher in Alaska and Hawaii. The GSEs only buy loans that are conforming to repackage into the secondary market, lowering the demand for non-conforming loans. Originally, Fannie had an 'explicit guarantee' from the government; if it got in trouble, the government promised to bail it out.
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- Fannie Mae.
This changed in Ginnie Mae was split off from Fannie. Ginnie retained the explicit guarantee. Fannie, however, became a private corporation, chartered by Congress and with a direct line of credit to the US Treasury. The charter also limited their business activity to the mortgage market. In this regard, although they were a private company, they could not operate like a regular private company.
Fannie Mae received no direct government funding or backing; Fannie Mae securities carried no actual explicit government guarantee of being repaid. This was clearly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. The certificates did not legally constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae.
During the sub-prime era, every Fannie Mae prospectus read in bold, all-caps letters: However, the implied guarantee, as well as various special treatments given to Fannie by the government, greatly enhanced its success. For example, the implied guarantee allowed Fannie Mae and Freddie Mac to save billions in borrowing costs, as their credit rating was very good. In testimony before the House and Senate Banking Committee in , Alan Greenspan expressed the belief that Fannie Mae's weak financial position was the result of markets believing that the U.
Government would never allow Fannie Mae or Freddie Mac to fail. Fannie Mae and Freddie Mac were allowed to hold less capital than normal financial institutions: The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the subprime mortgage crisis. FNMA is not exempt from state and local taxes.
That is, a worst-case default would drop a fund not more than five percent. However, these rules do not apply to Fannie and Freddie. It would not be unusual to find a fund that had the vast majority of its assets in Fannie and Freddie debt. In , the Congressional Budget Office wrote "there have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises Government-sponsored enterprises are costly to the government and taxpayers FNMA is a financial corporation which uses derivatives to "hedge" its cash flow.
Derivative products it uses include interest rate swaps and options to enter interest rate swaps "pay-fixed swaps", "receive-fixed swaps", " basis swaps ", " interest rate caps and swaptions ", " forward starting swaps ". Duration gap is a financial and accounting term for the difference between the duration of assets and liabilities, and is typically used by banks, pension funds, or other financial institutions to measure their risk due to changes in the interest rate.
From September to March, the gap has run between plus to minus one month. In late , Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report  on September 20, , alleging widespread accounting errors. Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On December 18, , U. Timothy Howard; and the former controller Leanne G. The three were accused of manipulating Fannie Mae earnings to maximize their bonuses.
After 8 years of litigation, in , a summary judgment was issued clearing the trio, indicating the government had insufficient evidence that would enable any jury to find the defendants guilty. Johnson and Franklin Raines , had received loans below market rate from Countrywide Financial. Fannie Mae was the biggest buyer of Countrywide's mortgages.
Fannie Mae and Freddie Mac have given contributions to lawmakers currently sitting on committees that primarily regulate their industry: Securities and Exchange Commission with securities fraud. He then resigned from CoreLogic. Piszel was not among the executives charged in December Kellermann committed suicide during his tenure at Freddie. In , the agency had a number of other big banks in the crosshairs as well.
JPMorgan JPM was one of 18 financial institutions the FHFA sued back in , accusing them of selling Fannie and Freddie securities that "had different and more risky characteristics than the descriptions contained in the marketing and sales materials". The firms have been controlled by the FHFA since their rescue. The question of whether any individual bankers will be held to account is another matter.