Fannie Mae And Mortgage Backed Securities
Fannie Mae is more than a company involved in the mortgage business. It calls itself the American Dream company. In 1938, under the Franklin Roosevelt administration, Fannie Mae was created to buy up existing mortgages from lenders, and thereby inject more money to be available to be loaned out in mortgages. They bought mortgages that were insured by the Federal Housing Administration. In 1968, Fannie Mae became a private company, not any longer associated with the Federal Government.
Fannie Mae is deeply involved in the Mortgage-Backed Security markets. Most Mortgage Backed Securities (MBSs) are issued by either Fannie Mae (also known as the Federal National Mortgage Association), or Ginnie Mae or Freddie Mac. Ginnie Mae is a US Government agency. The other two were sponsored by the government but now are privatized. Also, a certain number of the MBSs are issued by private companies.
Mortgage Backed Securities are securities, where the income to the investors is based on the financial returns of a pool of mortgages, which could be from hundreds or even thousands of different homes. These are the most basic types of MBSs, also known as "pass-throughs", or participation certificates (PCs), that is, the investors get to participate in the pool of mortgages.
These securities have a lot to do with what is keeping prices on the housing market high. Housing prices have doubled or tripled over the last five to ten years.
Some MBSs are more complicated in that they only represent the income from mortgage principal payments, or only from mortgage interest payments.
There are more exotic MBSs called collateralized MBSs or Mortgage Backed Derivatives, which try to compensate for various dangers to consistent mortgage payments, such as refinancing, which because it is early payment of the mortgage, it lessens the interest payments paid a great deal. These "Derivatives", for short, are also known as Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage Investment Conduits (REMICs). These are mixtures of different classes of mortgages, at different interest rates. They may be based on (collateralized) on pools of mortgages or based on securitized pools of mortgages.
A large amount of these instruments have been bought by foreign investors, who want to invest the dollars they have earned in a dollar denominated instrument, that has at least an implicit guarantee by the U.S. Government, even though it is not explicit. GNMA is a government agency, and Freddie Mac and Fannie Mae, although they are totally privatized, still have the privilege of borrowing money directly from the U.S. Treasury.