The Federal Housing Administration, or FHA, and the Federal National Mortgage Association, nicknamed Fannie Mae, are associated agencies focused on boosting home loans, especially to low- and – moderate-income property buyers. Neither agency makes home loans, however both have led to banks making many more home loans than they would have.
Prior to the 1930s, mortgages were short lived –often only five years–and demanded a balloon payment upon termination. Many folks refinanced at the end of the expression. Throughout the downturn, however, banks refused to refinance loans that they had made, resulting in large numbers of foreclosures. The FHA and Fannie Mae–both part of Roosevelt’s New Deal–were made to help solve this problem.
The purpose of the FHA was going to guarantee long-term, fixed-rate, amortized loansthat is, loans where the principal has been paid down gradually to zero. When the FHA provided to insure this type of loan, the marketplace then offered this type of loan instead of the shorter balloon mortgages. Fannie Mae was made to buy FHA-insured loans, thereby freeing up more bank funds that could be spent in more mortgages.
As time passes, its attention has been expanded by the FHA. Following the melancholy, it helped veterans. From the 1950s onward, it branched out to insure apartment buildings for the elderly and non invasive Americans. Back in 1989, it created the product called the reverse mortgage to help elderly homeowners catch the equity in their houses. Fannie Mae was converted from a federal agency to a publicly traded firm that retains authorities financing in 1968. Through the years it added to the practice of buying loans outright by securitizing–or turning the value of the mortgages to investment securities–and selling them.
Collectively the FHA and Fannie Mae opened the American dream of homeownership to countless thousands of Americans that may not otherwise have had the opportunity to obtain a home. In times of tight credit, all these agencies have given a lifeline, prompting banks to give if they might have.
The mortgage-backed securities bought and sold through Fannie Mae became increasingly complex investment goods and in some cases were linked with credit default swaps, another complex product resembling insurance but unregulated. Together with the housing-induced recession starting in 2007, both the FHA and Fannie Mae have endured: the FHA because it’s had to pay out more in insurance claims to creditors than anticipated, and Fannie Mae since it’s bought and sold securities based on mortgages which have defaulted in an abrupt rate.